Earnings Roundup: The S&P 500’s Financials and Technology Sectors Eight Years Later

President Obama’s last week in office had one thing in common with the start of his presidency, a focus on the Financials sector. However, eight years later, the story is considerably different. One of the other major sectors to change over those eight years is Information Technology. So, let’s look at how the picture has changed and gain insight into what’s to come as we head into the peak of Q4 2016 earnings season.

Exhibit 1. S&P 500: Momentum Scores & 16Q4 Results for Week of Jan. 16, 2017

Source: Eikon Aggregates Report, I/B/E/S

In Q4 2008, Y/Y earnings for the Financials sector plunged 1,458% and revenue for the quarter fell 20%. Today, the Financials sector is expected to see Q4 2016 Y/Y earnings grow by 17.2% and revenue grow by 3.1%. One of the more shocking parts, American International Group Inc. (AIG.N) and the Investment Banking & Brokerage sub-industry are among those expected to post the highest Q4 earnings growth, 207% and 146% respectively. Combined the two account for over half of the sector’s expected growth and when excluded Q4 Y/Y earnings for the Financials sector declines to 6.5%.

During the week of Jan. 16, 2017, a large block of the Financials sector reported Q4 2016 results. In aggregate, these 17 companies beat expectations by 25% and revenue by 0.9%. Earnings grew by 25% from the prior year and helped bring the expected growth rate for the sector to 17.2%. In addition to the highest expected Y/Y earnings growth rate for the quarter, analysts are bullish on the sector. This is seen by an aggregate StarMine Analyst Revisions Model (ARM) Region rank score of 62. ARM is an analyst revisions stock ranking model, designed to predict future changes in analyst sentiment. ARM ranks by region on a scale of 1 to 100, with 100 being the most bullish.

Equity and FICC trading were particular areas of strength for Morgan Stanley (MS.N), which beat expectations on both the top and bottom line. MS posted the largest earnings surprise for the week (24.5%) at $0.81 per share, up 88% from Q4 2015. Revenue of $9.0 billion came in 6.5% above expectations, an increase of 14.7% from the prior year. As a result, analyst sentiment remains bullish with a top ARM score of 100 (MS’s ARM score has ranked in the top decile of North American companies since Oct. 21, 2016).

During the conference call, James Gorman, Morgan Stanley – Chairman and CEO, gave an overview of events that transpired from 2008 to now and an outlook for the future, “In 2008 we embarked on a multi-year transformation of the wealth management Business. The Smith Barney acquisition gave us an undeniable scale benefit, particularly when combined with ongoing cost management. At the same time, we built our bank infrastructure and have seen material growth in annuitized revenues. As you can see, this led to a 22% compound growth rate in our pretax earnings since 2010, against a 4% growth in revenues.

What have been missing from this picture are retail investor engagement, and any material benefit from rising rates.  The Fed’s actions in December and expected rate increases in 2017 and 2018, combined with a more positive investor sentiment, lead us to believe there is real upside to the business over the next several years.”

Mr. Gorman went on to say, “There is certainly more reason to be optimistic as we ended 2017, than there was at the beginning of 2016. The surge in consumer confidence after the US election, the recent and anticipated Fed rate hikes, the strengthening US economy and potential corporate tax reform are positives for our business.”

A massive transformation in technology has transformed the way we interact with the world in ways that make today’s world different from the one we lived in when President Obama first took office. Back then, the hot topic for debate was if President Obama would give up his Blackberry, today the Blackberry has been replaced with the iPhone, and the hot topic is a debate about President Trump’s Twitter account. The list of changes is too long for this article. However, as we look at the changes brought on by smartphones, social media, online-shopping, and big data analytics we should remember that few thought they would have evolved to become a fundamental part of daily life. With this in mind, eight years from now, the possibility that virtual reality, smart cars, IoT, and A.I. will be embedded in our lives is certainly a possibility.

Analysts may not be looking eight years ahead, but they are bullish on the Information Technology, which has an ARM score of 66. The sector also ranks high on StarMine’s Price Momentum (Price-Mo) model, with a score of 80. Price-Mo intelligently acknowledges the tendency of long-term trends in returns to continue, plus the tendency of short-term trends to revert, with an innovative mix of components. These two scores show that Technology has momentum going into the new administration.

Scoring the highest in both ARM (79) and Price-Mo (84), the Semiconductors & Semiconductor Equipment industry group has the greatest momentum within the S&P 500. There are several driving factors. Among them are expected benefits in both new and old technologies within memory. A shortage in DRAM driving higher ASP’s and a revolution in capacity through 3D NAND.  This is part of the reason that memory makers Micron Technology Inc. (MU.O) and Western Digital Corp. (WDC.O) score the highest within the group with ARM scores of 100.

Many also expect a “super cycle” for Apple’s 10^th anniversary iPhone release. The later has caused some skepticism about impacts to suppliers if the iPhone doesn’t deliver; however, recent earnings releases indicate that complete dependence on Apple’s success may be outdated.

Skyworks Solutions Inc. (SWKS.O) beat on both the top and bottom line. SWKS reported earnings of $1.61 per share, 1.8% above consensus, up 0.6% from the prior year. Revenue beat by 1.3% with $914.3 million, down 1.3% from the prior year. However, the real news was that their ability to diversify from a heavy dependence on Apple. Liam Griffin, Skyworks Solutions, Inc. – President and CEO, explained this saying, “We’re starting to see some great penetration with leaders in China, we mentioned Huawei, certainly large players in the US, large players in Korea (Samsung), all exhibiting that. And then in parallel, and we’ve talked about this for awhile, but it’s really coming together nicely that our broad business, our broad market portfolio’s continue to grow.”

Looking ahead, Mr. Griffin said, “We have cars today. We’re all driving cars, but connectivity is going to really matter. So in order to make that market work, you’re going to need very aggressive 5G solutions, massively expanded pipe, data pipe for both transmit and down-link. All of that’s going to be incredible opportunity for us in broad markets, and that’s going to be out there a few years. “

As we look back the changes over the past eight years, and usher in a new administration my prediction is that we will be watching the next inauguration in VR. We may even see the “The Beast” with no driver.

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