Market Snapshot
| Dow | 43444.99 | -305.87 | (-0.70%) | | Nasdaq | 18680.14 | -427.53 | (-2.24%) | | SP 500 | 5870.63 | -78.55 | (-1.32%) | | 10-yr Note | +1/32 | 4.43 |
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| | NYSE | Adv 974 | Dec 1752 | Vol 1.1 bln | | Nasdaq | Adv 1223 | Dec 3002 | Vol 8.0 bln |
Industry Watch
| Strong: Real Estate, Financials, Utilities |
| | Weak: Information Technology, Health Care, Communication Services, Consumer Discretionary, Consumer Staples, Real Estate |
Moving the Market
-- Ongoing expectations for consolidation after election results
-- Concerns about rising rates after 10-yr yield briefly hit 4.50%
-- Digesting this morning's data, which corroborated Fed Chair Powell's comments yesterday indicating that the Fed isn't rushing to cut rates due to ongoing strength in the economy
-- Weakness in chipmakers after AMAT guidance didn't live up to high expectations
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Closing Summary
15-Nov-24 16:20 ET
Dow -305.87 at 43444.99, Nasdaq -427.53 at 18680.14, S&P -78.55 at 5870.63
[BRIEFING.COM] The stock market closed with solid losses. The S&P 500 fell nearly 80 points, or 1.3%. This decline left the index 1.5% higher since the election.
Many stocks contributed to index losses, sinking on concerns over interest rates and speculation that the Fed may be more cautious with rate cuts than the market previously hoped. The 10-yr note yield jumped to 4.50% in response to the October Retail Sales report, which was stronger than headline numbers suggest due to upward revisions in the September data.
Additionally, the NY Fed Empire State Manufacturing survey jumped to 31.2 in November, its highest level in nearly three years, supporting the view that the economy is not signaling a need for the Fed to rush into rate cuts. These factors align with Fed Chair Powell's comments yesterday.
The market's expectations for a rate cut at the December FOMC meeting have shifted. The fed funds futures market is pricing in a 58.4% probability of a 25-basis points rate cut at the December FOMC meeting versus 72.2% yesterday and 85.5% a month ago, according to the CME FedWatch Tool.
Treasury yields declined from their initial post-data spike, but that didn't provide any relief to equities. The 10-yr yield settled one basis point higher at 4.43% and the 2-yr yield settled one basis point higher at 4.30%.
Large-cap technology stocks, especially semiconductor-related names, suffered outsized declines compared to the broader equity market. This downturn followed fiscal Q1 guidance from Applied Materials (AMAT 168.88, -17.12, -9.2%), a leading chip equipment maker, which failed to meet the market's more optimistic expectations.
Weakness in chipmakers and other large-cap components led the S&P 500 information technology sector to move 2.5% lower. It was the worst performing sector followed by health care (-1.9%), communication services (-1.9%), and consumer discretionary (-1.4%).
The health care sector was reacting to the news that President-elect Trump nominated Robert F. Kennedy, Jr., known as a vaccine skeptic, to lead the Department of Health and Human Services.
- Nasdaq Composite: +24.4%
- S&P 500: +23.1%
- S&P Midcap 400: +15.3%
- Dow Jones Industrial Average: +15.3%
- Russell 2000: +13.7%
Reviewing today's economic data:
- The New York Fed Empire State Manufacturing Survey for November checked in at 31.2 (Briefing.com consensus 3.3) following a -11.9 reading for October. A number above 0.0 is indicative of expansion. The New Orders Index surged to 28.0 from -10.2.
- The key takeaway from the report is that the November reading is the highest reading in nearly three years; moreover, firms remained optimistic that conditions would continue to improve in the months ahead.
- Total retail sales increased 0.4% month-over-month in October (Briefing.com consensus 0.3%) following an upwardly revised 0.8% increase (from 0.4%) in September. Excluding autos, retail sales increased 0.1% month-over-month (Briefing.com consensus 0.2%) following an upwardly revised 1.0% increase (from 0.5%) in September.
- The key takeaway from the report is that the upward revisions for September make the October results better than they appear since the growth is coming on top of a higher base. With month-over-month increases for nonstore retailers (+0.3%), food services and drinking places (+0.7%), electronics and appliance stores (+2.3%), and building materials and garden equipment and supplies dealers (+0.5%), it is clear that the consumer continues to embrace discretionary spending activity.
- Import prices increased 0.3% month-over-month in October and were up 0.8% year-over-year. Excluding fuel, import prices were up 0.2% month-over-month and up 2.3% year-over-year. Export prices increased 0.8% month-over-month and were down 0.1% year-over-year. Excluding agricultural products, export prices jumped 0.6% month-over-month and were flat year-over-year.
- The key takeaway from the report is that prices picked up on a monthly basis following declines in August and September.
- Total industrial production decreased 0.3% month-over-month in October (Briefing.com consensus -0.3%) following a downwardly revised 0.5% decline (from -0.3%) in September. The capacity utilization rate fell to 77.1% (Briefing.com consensus 77.3%) from a downwardly revised 77.4% (from 77.5%) in September. Total industrial production declined 0.3% yr/yr while the capacity utilization rate was 2.6 percentage points below its long-run average.
- The key takeaway from the report is that industrial production in October was pressured by two extraordinary factors, but even excluding those factors, it was still relatively weak in October. The Boeing strike held down total industrial production growth by an estimated 0.2 percentage point in October while Hurricane Milton and the lingering effects of Hurricane Helene reduced industrial production growth by 0.1 percentage point.
- September Business Inventories increased 0.1% month-over-month (Briefing.com consensus 0.2%) following a 0.3% increase in August.
Looking ahead, Monday's economic calendar features: November NAHB Housing Market Index (prior 43) at 10:00 ET and September Net Long-Term TIC Flows (prior $111.4 bln) at 16:00 ET.
Treasuries settle with slim losses
15-Nov-24 15:35 ET
Dow -304.70 at 43446.16, Nasdaq -432.06 at 18675.61, S&P -80.00 at 5869.18
[BRIEFING.COM] The major indices are little changed over the last half hour.
The 10-yr yield settled one basis point higher at 4.43% after reaching 4.50% and the 2-yr yield settled one basis point higher at 4.30%.
Looking ahead, Monday's economic calendar features: November NAHB Housing Market Index (prior 43) at 10:00 ET and September Net Long-Term TIC Flows (prior $111.4 bln) at 16:00 ET.
Mega caps continue to limit performance
15-Nov-24 15:00 ET
Dow -322.23 at 43428.63, Nasdaq -454.56 at 18653.11, S&P -84.65 at 5864.53
[BRIEFING.COM] The major indices trade off session lows. The S&P 500 is down about 85 points, or 1.4%.
The equal-weighted S&P 500 is down 0.8%, holding steady through most of the session. Outsized losses in mega caps continue to weigh down the broader market.
Eli Lilly (LLY 751.10, -33.83, -4.3%) is a standout in that respect after The Wall Street Journal reported that the company is suing the Department of Health and Human Services related to rejected drug discount overhaul plans.
Omnicom, Moderna among top laggards in S&P 500 on Friday
15-Nov-24 14:30 ET
Dow -344.26 at 43406.60, Nasdaq -490.43 at 18617.24, S&P -91.77 at 5857.41
[BRIEFING.COM] The S&P 500 (-1.54%) is in second place on Friday afternoon, down about 90 points.
Elsewhere, S&P 500 constituents Omnicom (OMC 97.08, -7.96, -7.58%), Moderna (MRNA 36.99, -2.78, -6.99%), and Warner Bros. Discovery (WBD 9.19, -0.67, -6.80%) pepper the bottom of the average. OMC and MRNA weakness has been attributed in part to news that President-elect Trump will nominate Robert Kennedy Jr. as Secretary of the Dept. of Health and Human Services.
Meanwhile, Palantir Technologies (PLTR 64.66, +5.48, +9.26%) is atop the standings after announcing it will transfer its listing to the Nasdaq from the NYSE.
Gold pressured this week by rising dollar, bond yields
15-Nov-24 14:00 ET
Dow -382.25 at 43368.61, Nasdaq -503.77 at 18603.90, S&P -94.93 at 5854.25
[BRIEFING.COM] The major averages still hold solid losses on Friday afternoon, the tech-heavy Nasdaq Composite (-2.64%) currently at session lows on declines of more than 500 points.
Gold futures settled $2.40 lower (-0.1%) to $2,570.50/oz, all told down about -4.6% this week as the dollar and bond yields rallied this week.
Meanwhile, the U.S. Dollar Index is down about -0.1% to $106.62.
Post dragged down by a broader market pullback and continued adjusted volume declines in Q4 (POST)
Consumer packaged goods maker Post (POST -2%), which derives most of its revenue through cereal and pet food, quickly went stale today despite surpassing top and bottom-line forecasts in Q4 (Sep). Shares did initially creep higher on energetic Q4 numbers. However, enthusiasm quickly diminished out of the gate today.
A broader market pullback is one factor weighing on the stock. Another factor is the constant adjusted volume declines across most of POST's segments during the quarter, which may be starting to test investors' patience. When excluding one-time benefits, most segments outside Foodservice saw yr/yr volume compression almost every quarter in FY24.
However, this may not be entirely surprising, as management has conveyed that it focuses more on EBITDA and capital allocation. Still, POST cannot sustain persistent volume declines over the long term. The company noted today that it will continue to aggressively manage its lower margin businesses and not worry about volume reduction, expressing confidence that trends will start to rebound over time as it optimizes its footprint.
- POST's profitability and capital allocation strategy continue to bear fruit. In Q4, the company registered its eighth straight quarter of double-digit earnings upside. While adjusted EBITDA did remain flat yr/yr in Q4, on a two-year stack, POST has delivered a 45% uptick in the metric, half resulting from organic growth and the other half from acquisitions. POST has leveraged these gains into robust free cash flow, generating around $1.0 bln over that timeframe, giving POST the capacity to target M&A opportunities.
- M&A has been vital to POST's steady yr/yr revenue growth over the past two quarters despite lapping periods of over +20% growth. In Q4, sales inched 3.3% higher yr/yr to $2.01 bln. Post Consumer Brands, comprised of cereal and pet food, grew by 3.9% to $1.05 bln due to POST's $235 mln acquisition of Perfection Pet Foods, which kept revs from slipping by 2.7%. This dynamic was prevalent in Weetabix, POST's U.K. banner, which recorded positive growth due to its Deeside purchase and FX benefits.
- In Refrigerated Retail, which includes side dishes, egg, cheese, and sausage products, sales fell by 2.9%. However, the segment delivered a 0.7% volume bump, aided by side dishes and sausage growth.
- Foodservice was the star in Q4, touting a 4.7% sales improvement on a 3.6% uptick in volumes, driven by distribution gains in eggs and potatoes. This segment has been a steady grower for POST throughout the year, and management expects this to carry through to FY25. Speaking of which, POST outlined its adjusted EBITDA goal for FY25, projecting $1.41-1.46 bln, a 2.3% improvement yr/yr.
POST's Q4 report reflected management's attention to enhancing profitability, controlling what it can in a challenged economic environment where restaurant traffic continues to pull back and inflation still hurts the end consumer. Without a more favorable demand backdrop, POST's adjusted revenue growth may stall over the near term. However, the company has done a solid job preserving margins and bolstering its balance sheet, providing the fuel needed to navigate a tricky economy.
Alibaba's slide continues as Q2 results show sluggish growth continued for eCommerce business (BABA)
Shares of Chinese e-Commerce and cloud computing giant Alibaba (BABA) have been mired in a slump, down 25% since early October, and this morning's mixed Q2 earnings report isn't helping to turn the tide. Before the open yesterday, competitor JD.com (JD) provided a warning flag when the company posted disappointing quarterly results that included sluggish revenue growth of 5%, merely meeting analysts' Q3 expectations and indicating that China's economy is still sputtering. On the top-line, BABA matched JD's 5% growth, but that was slightly below expectations, inducing another round of selling for the stock this morning.
- Once the predominant e-Commerce platform in China, BABA has ceded significant market share to rivals like JD and Pinduoduo (PDD) after the Chinese government hit BABA with antitrust fines and forced the company to restructure and split into six separate units in March 2023. This so-called "rectification project", which was completed this past August, combined with China's real estate woes and slowing GDP growth, has put a serious dent into Taobao's and Tmall's growth -- BABA's two main e-Commerce platforms.
- In Q2, Taobao and Tmall generated revenue growth of just 1% on a combined basis to RMB 98.99 bln, missing expectations. That did represent an improvement from last quarter's 1% decline, but the pedestrian growth is doing little to instill confidence that BABA's e-Commerce business will experience a meaningful upswing in growth anytime soon. With that said, the company is optimistic that the launch of additional stimulus measures from the PRC government will provide a spark for consumer spending, although the positive impact from any stimulus package would take some time to trickle through the economy.
- There were some bright spots for BABA in Q2. Notably, the Cloud business generated stronger growth of 7% to RMB 29.6 bln, driven by AI product revenue, which grew at triple-digits for the fifth consecutive quarter. Alibaba Cloud provides a range of services such as storage, databases, security, and content delivery networks that's available on a pay-as-you-go basis. Recently, BABA had unleased new AI products and features, such as Quanzhantui, a marketing tool that's seeing strong merchant adoption.
- BABA's international business was another standout with revenue jumping by 29% yr/yr to RMB 31.67 bln. The international business mostly operates as a B2B e-Commerce platform, enabling foreign vendors to connect and source products in bulk from Chinese sellers. Strong growth in the AliExpress' Choice business, especially in the European and Gulf regions, fueled the impressive performance for international.
Overall, it was a decent quarter for BABA, thanks to its Cloud and International businesses, but macroeconomic headwinds in China continue to weigh the company's core e-Commerce business down. The prospects for additional stimulus measures from China's government offers some hope that growth will improve, but the stock could continue to languish in the meantime.
Applied Materials' mild Q1 sales outlook, partly from normalizing China revs, sinks the stock (AMAT)
For the fifth consecutive quarter, Applied Materials (AMAT -8%) cleared earnings and sales estimates in Q4 (Oct) and projected Q1 (Jan) numbers consistent with analyst forecasts. However, despite this steady string of performance from the semiconductor equipment supplier, AMAT is slipping toward September lows.
Ahead of AMAT's report, warning signs were flashed by counterpart ASML (ASML) with its dismal Q3 (Sep) report and gloomy FY25 (Dec) outlook, prompted by a sour combination of a sluggish recovery pace across end markets outside of AI and worries over further export restrictions on advanced chips to China. This injected unease into the market, disproportionately affecting ASML's closest peers, including AMAT, as well as KLA Corp (KLAC), Lam Research (LRCX), and NXP Semi (NXPI).
Given this context, investors find AMAT's Q4 report inadequate, particularly surrounding its Q1 (Jan) guidance. AMAT projected revenue of $6.75-7.55 bln, the midpoint falling shy of analyst estimates. China is a factor in the relatively underwhelming outlook. Revenue from the region dropped to 30% in the quarter, down 2 pts sequentially and 10 pts from Q2 (Apr) levels when AMAT was shipping to outsized DRAM demand, reflecting a quick shift in economic conditions. AMAT anticipates China revs to hover around 30% for the near term. Meanwhile, uncertainty hangs over AMAT as potentially tighter export restrictions loom given the upcoming change in the U.S. administration, which could push revenue from China even lower.
- The future demand for AI is less uncertain. AMAT reiterated that the most significant tectonic shift is AI and its virtually endless applications, which boast the potential to transform nearly every aspect of the global economy. AMAT noted that deploying AI at this large scale requires an estimated 10,000x jump in computing performance per watt, an efficiency target the company is positioned to deliver over the long haul.
- AI remained central to AMAT's consistent outperformance in Q4, supporting its 4.8% jump in revs yr/yr to $7.04 bln and 8.9% improvement in adjusted EPS to $2.32. Foundry/logic sales jumped 12% as investments for Gate-All-Around -- a transistor design allowing for improved performance and lower power consumption, perfect for AI -- continued to swell. On the services side, revenue climbed by 11% to a record $1.64 bln.
- However, like its peers, markets outside AI did not fare as well. DRAM sales slid by 10%, reflecting the normalized mix of China revenue. Meanwhile, NAND sales were unchanged from last year. Also, ICAPS sales, which serve customers across IoT, communications, auto, power, and sensor markets, inched lower. Lastly, AMAT's relatively small Display business plunged by 29%, underscoring persistent weakness within the consumer electronics market.
AMAT's Q4 report contained bright spots, including healthy AI-related demand and management's confidence in wafer fab equipment spending enjoying another year of growth in 2025. However, given the uncertainty across the macroeconomic and geopolitical landscape, the company's Q1 guidance fell short of alleviating current unease. We mentioned in our preview that China could pose a sticky headwind as its economy languishes and U.S./China relations remain brittle. Without AMAT issuing a rosier near-term outlook, this overhang may persist, producing volatility over the next few months.
Globant under pressure despite pretty good Q3 report; not seeing deterioration in budgets (GLOB)
Globant (GLOB -9.5%) is trading sharply lower today despite an upside Q3 report with decent Q4 guidance last night. We think expectations were running a bit high heading into this report given the steady rise in its share price since early June +(+51%). It is also up around 9% just since early November. Globant is a technology service provider that helps companies go digital with AI technology being a key part of that.
- Non-IFRS (same as non-GAAP) EPS grew 10% yr/yr to $1.63, which was at the high end of prior guidance of $1.60-1.64. However, it was only slightly above analyst expectations. In fairness, GLOB is known for small EPS beats in the $0.01-0.02 range, so this was par for the course. Unlike many tech names, GLOB actually provides realistic guidance and does not lowball guidance, just to report big upside.
- Revenue rose 12.7% yr/yr to a record $614.7 mln, which was right in-line with analyst expectations and at the mid-point of prior guidance of $611-617 mln. The Q4 guidance was in-line. Notably, revenue from its largest client, Disney (DIS), increased by 17.5% yr/yr and 14% sequentially, so that was good to see. North America accounts for 55.7% of revs, followed by Latin America (21.8%), Europe (17.6%), and the Middle East and APAC at 4.9%.
- Globant sees strong demand in its main industries and says it's growing market share everywhere. For 2024, Globant says it's expecting the highest growth of any major IT service provider, with an estimated of 15% increase in revenue. Bookings are solid, with two of the biggest in company's history secured in the last six months. For 2025, GLOB is confident about double-digit revenue growth due to a strong pipeline and faster organic growth.
- GLOB sounded very bullish on AI. Clients are using AI tools both personally and professionally. Globant calls AI the biggest breakthrough since smartphones. Last year, companies spent $15 bln on generative AI and it cited an industry report saying that spend could reach $175-250 bln by 2027. In the first nine months of 2024, AI-related work generated over $250 mln in revenue for GLOB, up 120% yr/yr.
- Globant noted that it is seeing clients take a more active approach in terms of incorporating AI in 2024. Last year, a lot of the work was exploratory, analyzing the technology, assessing impact etc. As such, typical bookings were very small. In 2024, the AI work is much more intentional and GLOB sees a bigger pipeline.
- In terms of its macro view, GLOB is not seeing deterioration in clients' budgets for 2025. In fact, GLOB says it's seeing more stabilization after 2-3 years of an industry where growth was scarce. GLOB says it was a tough industry but it looks like things are stabilizing or getting a little bit better.
Overall, this was a good quarter for Globant considering the macro pressures that its industry has been facing in recent quarters. We are not seeing a glaring reason for the stock being down so much today. We think it may be the muted upside and in-line guidance. Also, remember this stock was up more than 50% from early June to yesterday's close, so investors perhaps are using this report as an opportunity to lock in gains. We also suspect that weakness in tech and the Nasdaq today are also weighing on shares.
Ibotta getting clipped as digital coupon company issues disappointing Q4 guidance (IBTA)
Ibotta (IBTA) isn't looking like such a great bargain to investors after the provider of a digital coupon and promotions platform issued its Q3 earnings report. Heading into the print, the stock had been on a roll, rallying by 27% since the beginning of October, indicating that expectations were high for the company, especially in the wake of signing a major new deal with grocery delivery company Instacart (CART) in August. While IBTA did indeed post strong Q3 results that topped EPS and revenue expectations, its guidance for Q4 fell flat, instigating a sharp profit-taking pullback in the stock.
- Total redemption revenue increased by a healthy 28% yr/yr to $84.5 mln while the total number of redeemers on the Ibotta Performance Network (IBN) soared by 63%. In fact, in Q3, coupon redeemers reached a new record high of 15.3 mln, illustrating how IBTA's business performs well in difficult economic times. On that note, the company commented nearly half of Americans are living paycheck-to-paycheck, while nearly a third of consumers are spending about 90% of their income on necessities.
- IBTA's redemption revenue growth is being entirely driven by third party redeemers (3P), such as Walmart (WMT), Kroger (KR), and Costco (COST). More specifically, third party publisher redemption revenue rocketed higher by 129% yr/yr, compared to a 20% drop in the direct-to-consumer channel.
- Not only is IBTA seeing a surge of consumers come to its platform, but it's also experiencing strong growth in the number of consumer-packaged goods (CPG) clients. In FY24, the company has seen a 65% increase in gross billings for its CPG redemption business.
- The strong redemption and revenue growth is generating operating leverage, resulting in Q3 adjusted EBITDA margin improving to 37% from 28% in the year-earlier period. Adjusted EBITDA of $36.5 mln came in above IBTA's Q3 guidance of $28-$32 mln.
- Clouding over these positives is IBTA's Q4 revenue guidance of $100-$106 mln, which fell short of expectations, and its forecast of a qtr/qtr decline in adjusted EBITDA to $30-$34 mln. Typically, Q4 is IBTA's seasonally strongest quarter of the year, but this year the company expects downward pressure on redemption revenue in Q4. This is due to its CPG customers exhausting their 2024 promotional budgets faster than anticipated, leaving less to allocate in Q4.
- On the positive side, IBTA said that it has received indications from its largest clients that they intend to increase their investment levels as they set their 2025 budgets. Furthermore, the company is expecting the CART partnership to contribute more meaningfully in 2025.
The main takeaway is that IBTA's disappointing Q4 guidance is clouding over its solid Q3 results, but the downside guidance does appear to be more temporary in nature as its CPG customers burnt through their promotional budgets faster than expected. IBTA's business should still thrive as consumers remain in a cost-conscious mindset, and as CPG companies look for ways to become more competitive on price.
The Big Picture
Last Updated: 15-Nov-24 15:01 ET | Archive
Pulling back from the overdone pull forward
Some of the election dust has settled, but not all of it. There was a lot of dust kicked up by the stock market, which quickly ran to new all-time highs after the election results showed Donald Trump had scored a decisive victory in the presidential election and that he was likely to have a GOP majority in the House and Senate with which to work.
The GOP majority in the House was confirmed this week, which ended up being a pullback week for a stock market that had pulled forward a lot of good news.
Questions Being Asked
As discussed last week, the stock market's enthusiasm for the election results revolved around its thinking that president-elect Trump will pursue plans to cut taxes and regulations in what has been labeled a pro-growth agenda.
Growth is good. The path to future growth is paved with good intentions, but as we also noted last week, it is always easier to campaign than it is to govern.
President-elect Trump will have Congress on his side -- certainly for the first two years of his administration. The numbers just line up that way, yet the GOP majority in the House will be a slim majority that leaves little room for defection when it comes to passing tax plans.
The current period is a kumbaya period where GOP members all seem to be on board with the president-elect's plans, only the train hasn't left the station.
Eliminating taxes on tips; eliminating taxes on overtime pay; and eliminating taxes on Social Security benefits are promising-sounding campaign proposals that just might get derailed by deficit hawks inside the GOP, who will also be dealing with proposals to lower the corporate tax rate, raise the SALT cap, and extend the reduced personal tax rates from the 2017 Tax Cuts and Jobs Act that expire at the end of 2025.
That possibility wasn't taken into account in the post-election rally. In that rally, everything was possible, if not likely. It was a buy-first-ask-questions-later kind of move. The pullback this week was about questions being asked.
- Did the market get too far ahead of itself in its post-election rally?
- Is inflation going to heat up again -- or at least not make it to the Fed's 2% target?
- How many times will the Fed cut rates, and will the neutral rate be higher than previously thought?
- Why are market rates going up?
- Can president-elect Trump keep the deficit under control and inflation in check with his policy proposals?
- Can NVIDIA (NVDA) live up to investors' sky-high expectations when it reports its earnings results in the coming week?
The Velveteen Estimate
Today, we plan only to tackle the first question: Did the market get too far ahead of itself in its post-election rally?
The answer is yes. It is an easy answer because nothing has happened -- and things won't start happening on the policy front for another few months when the new Congress is sworn in, and president-elect Trump rightfully becomes President Trump again on January 20.
Nonetheless, there is no stopping a forward-looking market when it has its mind made up that good things are in the offing. In this case, it envisioned stronger profit growth with a lower corporate tax rate and less regulation.
How much stronger? Goldman Sachs estimates that the lower corporate tax rate could add 4-5% to S&P 500 earnings growth, but that wouldn't be until 2026. According to FactSet, the current consensus estimate for 2026 S&P 500 earnings is $308.84. A 5% increase would elevate that number to $324.28, which is 19% higher than the current 2025 consensus estimate of $273.46.
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| 5,862.00 | Forward 12-Month | 268.95 | 21.8 | | 5,862.00 | CY25 | 273.46 | 21.4 | | 5,862.00 | CY26 | 308.84 | 19.0 | | 5,862.00 | CY26 +5% | 324.28 | 18.1 |
S&P 500 PricePeriodConsensus EstimateP/ESource: FactSetWhat looks better? A P/E multiple of 21.8 or a P/E multiple of 18.1? Here again, it is an easy answer.
A P/E multiple of 18.1 is a lot less demanding than a P/E multiple of 21.8 when stacked against a 10-year average of 18.1. Participants clearly saw a pathway in the inflated 2026 estimate to the market not being "overvalued" like it was on November 4, and they ran with that.
In effect, they pulled forward an earnings estimate that isn't real yet, but because they loved it, they made it real in their mind, justifying the rush to new all-time highs.
Take It Back
Who knows? The Velveteen 2026 earnings estimate could end up being real, but there is a long negotiating row to hoe to get there, and it won't be easier if interest rates remain elevated -- or also move higher into 2026 because of other issues like deficit concerns or inflation heating up.
The October CPI and PPI reports didn't connote some warm and fuzzy inflation feelings with core-CPI up 3.3% year-over-year and core-PPI up 3.1% year-over-year. What they did do is temper the market's rate cut expectations. Those got pulled forward as well.
A month ago, the market expected the target range for the fed funds rate to be 3.25-3.50% following the September 2025 FOMC meeting. Now, it is expected to be 3.75-4.00%, according to the CME FedWatch Tool, so 50-basis points higher than previously envisioned.
Given that, the stock market has taken back some of the rate cut premium in stock prices that had been pulled forward.
What It All Means
The parabolic move following the election wasn't going to be sustained. The market had gotten ahead of itself, all charged up with a powerful mix of liquidity, a fear of missing out on further gains, short-covering activity, and the most upbeat earnings view into 2026 (forget about 2025).
It pulled forward that view, and pulled down the earnings multiple along with it, to rewrite an overvalued narrative that flowed from a market cap-weighted S&P 500 trading at 22.4x forward 12-month earnings at its post-election peak on November 11 -- a 24% premium to the 10-year average.
While there is a difference between campaigning and governing, there is also a difference between proposals and policy.
There isn't a policy agreed to yet that will lower the corporate tax rate or any tax rate. There will be a push for that, but the market pulled forward too much, too soon, when it comes to pricing in tax cuts and rate cuts. Hence, it needed to pullback to let the dust from an overdone, post-election rally settle.
-- Patrick J. O'Hare, Briefing.com
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