The widely-held mega-cap stocks that dominate the US markets are just wrapping up another blockbuster earnings season. Sales and profits soared largely due to Republicans’ massive corporate tax cuts. Still these lofty stock markets are vulnerable to serious downside, as October’s brutal plunge proved. Such extreme revenue and earnings growth cannot persist, and valuations remain in dangerous bubble territory.
Four times a year publicly-traded companies release treasure troves of valuable information in the form of quarterly reports. Required by the US Securities and Exchange Commission, these 10-Qs contain the best fundamental data available to investors and speculators. They dispel all the sentimental distortions inevitably surrounding prevailing stock-price levels, revealing the underlying hard fundamental realities.
The deadline for filing 10-Qs for “large accelerated filers” is 40 days after fiscal quarter-ends. The SEC defines this as companies with market capitalizations over $700m. That currently includes every stock in the flagship S&P 500 stock index (SPX), which includes the biggest and best American companies. The middle of this week marked 38 days since the end of Q3, so almost all the big US stocks have reported.
The SPX is the world’s most-important stock index by far, with its components commanding a staggering collective market cap of $26.1t at the end of Q3! The vast majority of investors own the big US stocks of the SPX, as some combination of them are usually the top holdings of nearly every investment fund. That includes retirement capital, so the fortunes of the big US stocks are crucial for Americans’ overall wealth.
The major ETFs that track the S&P 500 dominate the increasingly-popular passive-investment strategies as well. The SPY SPDR S&P 500 ETF, IVV iShares Core S&P 500 ETF, and VOO Vanguard S&P 500 ETF are among the largest in the world. This week they reported colossal net assets of $265.5b, $164.9b, and $101.5b respectively! They were naturally even larger at the end of Q3 before October’s carnage.
Every quarter after earnings season it’s essential to review the big US stocks’ latest results to see how they’re faring fundamentally. Their quarterly reports offer the best and latest fundamental data, and considered as a whole provide many clues on likely near-future stock-market trends. And since the SPX hit new record highs in late Q3 before plunging in early Q4, these latest results may prove a critical inflection point.
While I’d love to analyze all 500 SPX stocks each quarter, my small financial-research company lacks the manpower. Support our business with enough newsletter subscriptions, and I’ll hire the people necessary to do it. For now I’m digging into the top 34 SPX/SPY components ranked by market cap. That’s simply an arbitrary number that fits neatly into the tables below, but it happens to be a dominant sample of the SPX.
At the end of Q3, these 34 elite American companies alone accounted for a colossal 43.4% of the total weight of the S&P 500! Their enormous total market cap of $11.3t equaled that of the bottom 436 SPX companies. So the big US stocks’ importance to the entire stock markets cannot be overstated. They are the mighty engine driving overall stock-market performance, dragging everything else along for the ride.
Every quarter I wade through the 10-Q SEC filings of these top SPX companies for a ton of fundamental data I dump into a spreadsheet for analysis. The highlights make it into these tables below. They start with each company’s symbol, weighting in the SPX and SPY, and market cap as of the final trading day of Q3’18. That’s followed by the year-over-year change in each company’s market capitalization, a key metric.
Major US corporations have been engaged in a wildly-unprecedented stock-buyback binge ever since the Fed forced interest rates to deep artificial lows during 2008’s stock panic. Thus the appreciation in their share prices also reflects shrinking shares outstanding. Looking at market-cap changes instead of just underlying share-price changes effectively normalizes out stock buybacks, offering purer views of value.
That’s followed by quarterly sales along with their YoY changes. Top-line revenues are one of the best indicators of businesses’ health. While profits can be easily manipulated quarter-to-quarter by playing with all kinds of accounting estimates, sales are tougher to artificially inflate. Ultimately sales growth is necessary for companies to expand, as bottom-line profits growth driven by cost-cutting is inherently limited.
Operating cash flows are also important, showing how much capital companies’ businesses are actually generating. Using cash to make more cash is a core tenet of capitalism. Unfortunately many companies are now obscuring quarterly OCFs by reporting them in year-to-date terms, which lumps in multiple quarters together. So these tables only include Q3 operating cash flows if specifically broken out by companies.
Next are the actual hard quarterly earnings that must be reported to the SEC under Generally Accepted Accounting Principles. Late in bull markets, companies tend to use fake pro-forma earnings to downplay real GAAP results. These are derided as EBS earnings, Everything but the Bad Stuff! Companies often arbitrarily ignore certain expenses on a pro-forma basis to artificially boost their profits, which is misleading.
While we’re also collecting the earnings-per-share data Wall Street loves, it’s more important to consider total profits. Stock buybacks are executed to manipulate EPS higher, because the shares-outstanding denominator of its calculation shrinks as shares are repurchased. Raw profits are a cleaner measure, again effectively neutralizing the impacts of stock buybacks. They better reflect underlying business performance.
Finally the trailing-twelve-month price-to-earnings ratios as of the end of Q3’18 are noted. TTM P/Es look at the last four reported quarters of actual GAAP profits compared to prevailing stock prices. They are the gold-standard metric for valuations. Wall Street often intentionally obscures these hard P/Es by using the fictional forward P/Es instead, which are literally mere guesses about future profits that often prove far too optimistic.
