Did the Fed change the market’s tone?
It’s too early in the balance sheet shrink to determine if the market has really shifted its tone. Righ now, it seems like we’ll have to “wait and see.” Stocks are still reacting to their own fundamentals. Let’s look at how a few movers from the previous week fared last week.
The star-bellied breach of the investment world staged a solid comeback of 13% last week. As you might recall, we argued that before the breach, Equifax didn’t look great on a valuation basis. A 35% fall moved it more in line with where its valuation could be feasible. Before last week’s bounce, the stock fell to 14.3x 2018e earnings with a 1.7% dividend yield for 7% growth—much better than the 21x multiple and 1.3% yield before the fall. So, investors must feel that no matter how bad the breach was and how bad Equifax (EFX) handled it, the core business will likely bounce back or at least not be impacted too much.
Apple (AAPL) is on the other end of the spectrum. Clearly, investors are concerned that the iPhone 8 isn’t enough of an improvement to get consumers to upgrade. The iPhone X is expensive and won’t come out for months (possibly with production problems). Apple’s multiple has fallen to 13.5x 2018e earnings estimates for what appears to be 18% growth. The stock has fallen by $14 since before the launch. It appears that investors don’t believe the 2018 estimates. The estimates might need to come down if fewer iPhone 8s will be sold or over a longer timeframe. The chart has gotten a little ugly but the 150 and 200-day moving averages loom just below at $149 and $142, respectively. We’ll see when the bulls return to this one.
After falling 5.5% on the earnings print last week, Oracle (ORCL) seems to have stabilized and flattened out. However, the company is back to top-line growth of 3%–4% with a 6% dividend yield. Investors were probably hoping for a bit of an uptick in growth after the shift to SAAS for many products over the years. We aren’t seeing it for the foreseeable future. When growth and value aren’t huge, it sometimes keeps these kinds of stocks in a range.