October 23, 2024

Earnings Could Prolong the Bull Run

The market has been generally very good, although it’s wobbling this week so far.

The bull market that started two years ago has returned more than 60% in the S&P 500. The index is up about 23% year to date. The market rally has also broadened since the summer to include many other stocks and sectors besides technology.

Why not? Interest rates have peaked. The Fed has begun a rate-cutting cycle that will last for the next two years. And the economy is still solid with no signs of recession. Earnings are expected to be solid this quarter and for a while. The 493 S&P 500 stocks that don’t include the “magnificent seven” moniker are expected to average 13% earnings growth for the next five quarters.

While other sectors have been leading the market higher for the last several months, don’t write off technology. The artificial intelligence trade sputtered last quarter, giving some the impression that the catalyst has run its course for now. But it probably hasn’t. There are indications that this could be another powerful earnings season for AI-related stocks.

The bellwether AI stock Nvidia (NVDA) has been soaring this month on perceived robust demand for AI chips. The portfolio’s own Broadcom (AVGO) is back near the high. Apple (AAPL) and Netflix (NFLX) are also soaring. Technology could make a lot of noise this quarter and that’s good for portfolio positions AVGO and Qualcomm (QCOM).

That said, there are still risks out there, as always. The two wars aren’t ending and could escalate at any time. There is a hugely contentious election in two weeks. Interest rates have been moving higher on the perceived stronger economy. The benchmark 10-year Treasury has spiked to 4.17% from about 3.6% in mid-September. The ideal situation would be an economy weak enough to prompt lower interest rates but nowhere near a recession. This isn’t ideal, which is why the market has been down this week.

Stocks are also expensive. After averaging about 30% a year for the last two years, versus the long-term average of 11%, valuations on the S&P are getting stretched. Although bull markets rarely end after two years because of valuation, returns could be far more mild going forward.

A flatter market bodes well for dividend stocks, as the dividends account for a greater portion of total returns. In addition, many defensive dividend stocks have had a rough time for most of the last two years, until recently. But these stocks are much more cheaply valued than the overall market and now have some momentum.

Despite a likely flattening market over the next year, it could still be a stellar rest of 2024, and this earnings season could be the catalyst. Things are good for now and may stay that way for a while. But expect less going forward.

Recent Activity

October 9
Purchased Toll Brothers, Inc. (TOL) - $151
Constellation Energy Corporation (CEG) – Rating change “BUY” to “HOLD”
Alexandria Real Estate Equities, Inc. (ARE) – Rating change “BUY” to “HOLD”

High Yield Tier

AGNC Investment Corporation (AGNC – yield 13.9%) – This high-yielding mortgage REIT has been trending higher since April. There was somewhat of a selloff in September and early October as economic strength put a damper on the interest rate decline expectations. But AGNC has bounced right back near the high. The current perception of a strong economy may temper interest rate declines, and thus the stock price advance. But the delay should be temporary. The narrative could change, and rates should trend lower over the next several quarters regardless. BUY

Brookfield Infrastructure Partners (BIP – yield 4.5 %) – This infrastructure behemoth is finally getting some lasting upside traction. BIP just hit a new 52-week high last week. After struggling mightily for what seemed like forever, BIP is up about 40% since the middle of April. This unique utility had been a stellar performer for many years prior to inflation and rising interest rates. But now interest rates have peaked and are highly likely to trend lower in the quarters and years ahead. Brookfield is also highly recession resistant should that come about. It should have the right stuff at the right side of the interest rate cycle and with highly defensive earnings. (This security generates a K-1 form at tax time.) BUY

Enterprise Product Partners (EPD – yield 7.2%) – Although this steady midstream energy partnership has returned (between dividends and appreciation) over 16% YTD and is within pennies of the 52-week high, it has been rangebound since the spring. The improving interest rate situation has reignited previously beleaguered REITs and Utilities, and those sectors have gotten most of investors’ attention. Midstream energy companies are not being seen as a turnaround because they have been performing well all along. Still, EPD has not had the recent move higher that many of its peers have had. Despite the lack of recent upside, EPD pays the highest yield, and the stock has been very steady. (This security generates a K-1 form at tax time.) BUY

FS KKR Capital Corp. (FSK – yield 13.5%) – FSK is getting some strength from the strong job numbers and current perception of a solid economy going forward. It owns a portfolio of small companies that tend to be vulnerable during a recession. This ultra-high-yielding Business Development Company went ex-dividend last month and the price barely moved. When a security has a payout and yield of this size it usually pulls back after the quarterly dividend gets priced out of the stock. But the upside momentum met that downside catalyst head-on and greatly mitigated the damage. As long as the economy stays out of trouble, FSK should be solid. HOLD

Main Street Capital Corporation (MAIN – yield 5.7%) – MAIN is back in business and just made a new high this week as faith in the economy has grown. It took a hit in early August from the temporary recession scare but it has recovered and been trending higher since. Solid earnings and reduced recession fears are leveling the stock. The BDC reiterated its monthly dividend of $0.245 per share for the rest of the year and announced an additional $0.30 per share supplemental dividend that was paid in September. The good performance should continue if the economy stays away from a recession. HOLD

ONEOK Inc. (OKE – yield 4.1%) – This midstream energy company stock continues to deliver terrific performance. It’s up 42% YTD and 23% since early August, even though it endured a 5.8%, one-day selloff last month. It dipped in late September but has since recovered all that and then some and made a new all-time high this week. The main recent upside catalyst is the soon-to-be accretive acquisitions of Enlink Midstream (ENLC) and Medallion Midstream. The deal will boost earnings over the next year and the market loves it. At the same time, there could be tailwinds from an escalation of the war in the Middle East and a corresponding spike in energy prices. HOLD

The Williams Companies, Inc. (WMB – yield 3.7%) – This midstream energy company stock made yet another new high this week. Without a lot of fanfare, WMB has returned over 50% YTD. It’s also up 13% in the last month. Midstream energy companies continue to outperform because they have little commodity price exposure and offer a high income in an uncertain market. Williams guided to the upper half of 2024 estimates and is still in an uptrend that began in the middle of February. BUY

Dividend Growth Tier

AbbVie (ABBV – yield 3.3%) – This cutting-edge Pharma company stock had leveled off and returned nothing for the last two months. But it had a big surge to a new high before then and it didn’t pull back. That was encouraging because ABBV typically trades in a range and pulls back after a surge. But the stock has been slipping this past week. It’s only fallen a few percentage points so far but it hit the lowest level since August. The anticipated price weakness may finally be unfolding. But the longer-term prognosis is still strong. Investors are increasingly confident in the company’s ability to replace the lost Humira revenue. ABBV is getting through this year in spades ahead of greener pastures next year when management expects the company to return to “robust growth.” HOLD

American Tower Corporation (AMT – yield 2.9%) – This cell tower REIT was red hot, but it has pulled back over the past month. AMT had been in an uptrend that lasted from May to early September where it rose more than 40% but it has dropped a few percent since. A cool-off period after such a rise is normal, especially when the REIT sector is taking a bit of a hit. It has benefited hugely and early from the REIT revival as its niche technology properties make it highly desirable. The prognosis looks bright as customers are being added to existing towers and the properties continue to expand in the U.S. and overseas. American Tower also raised guidance for 2024. BUY

Broadcom Inc. (AVGO – yield 1.2%) – This AI powerhouse was kind of bouncing around and going nowhere since the announcement of a 10-for-1 stock split in June. But it has been trending higher again since early September and is back near the high. The AI trade cooled off last quarter, but it might be getting hot again. Nvidia (NVDA), the direction of which AVGO usually mimics, has rallied over 18% in October. The rise in chip stocks ahead of earnings is an encouraging sign that AI earnings have not slowed down and could get a big boost after the third-quarter earnings reports. BUY

Cheniere Energy, Inc. (LNG – yield 1.0%) – The stock pulled back after a spike earlier this month and has been bouncing around and going nowhere since late July. The energy sector was getting a bump as energy prices increased because of the escalation of tensions in the Middle East. But that move has faded, for now. LNG, and just about all energy-related stocks, can live and die in the near term on the fortune of energy prices. But the longer-term trajectory should be higher as the world will continue to demand U.S. natural gas and Cheniere is the largest exporter. BUY

Constellation Energy Corporation (CEG – yield 0.5%) – This nuclear energy provider has become a bona fide superstar. It has already returned 47% in the two months it has been in the portfolio. CEG had a huge one-day, 22% move higher after it was announced that Microsoft (MSFT) made a deal with Constellation to buy electricity generated from a future reopening of the Three Mile Island nuclear plant in Pennsylvania. Constellation says it is the largest electricity purchase in history. The deal will add to its projected double-digit earnings growth in the years ahead. Also, the electricity demand rise and technology companies’ desire for carbon-free nuclear power is getting a lot of investor attention. Future increases in business from other big technology companies is now more likely. HOLD

Digital Realty Trust, Inc. (DLR – yield 3.0%) – It’s a new peak. The data center REIT just hit another new high. DLR has returned 25% YTD and 47% since being added to the portfolio 15 months ago. DLR was going strong when other REITs were struggling and now the sector is in a much better position as interest rates are likely to move lower. But the main story is the data center properties that are a high-growth business. Tech companies are forecast to invest $1 trillion in data centers over the next five years to accommodate AI. BUY

Eli Lilly and Company (LLY – yield 0.6%) – This stud pharma stock has leveled off and gone nowhere since early July. It recovered strongly from a dip in July and August, but it’s still in the same place it was three months ago. Despite that, LLY is still up 54% YTD and hasn’t given anything back. It made a lofty new high and maintained it without even consolidating.

The prognosis is still excellent as its leading weight-loss and type 2 diabetes drugs are still just near the start of their global market penetration. The company has invested $20 billion in manufacturing capacity in the last four years to meet growing demand. Analysts currently forecast 73% annual earnings growth for Lilly for the next five years. Lilly reports earnings at the end of the month and could get a boost. BUY

McKesson Corporation (MCK – yield 0.6%) – Unfortunately, supply issues with Novo Nordisk’s (NVO) weight-loss drug are a problem for this pharmaceutical supply chain company. Earnings disappointed with lower-than-expected revenues last quarter and the company cited weight-loss drug supplies that couldn’t keep up with demand as the main cause. A recent report indicates that it could be more of the same for McKesson in this quarter. The stock is way down from the high. It’s off the low but still at near the bottom of the recent range. I’m not sure how this issue will get sorted out in the near term. But it’s a temporary problem and the longer-term prognosis for MCK is excellent. BUY

Qualcomm Inc. (QCOM – yield 2.0%) – This sleeping giant semiconductor stock pulled back over the summer and has been going sideways for months. But it’s still up about 24% YTD. QCOM can make up for lost time fast when it does move. This earnings season could be the catalyst. The AI trade sputtered last quarter but there are signs of a resurgence as earnings could be stellar again. Qualcomm reports at the end of this month. The company is very well positioned ahead of the next wave of AI, which should be in mobile devices. Analysts are forecasting a strong upgrade cycle for smartphones sometime next year. The stock seems to be treading water until its next move higher, whenever that will be. BUY

Toll Brothers, Inc. (TOL – yield 0.6%) – This new addition homebuilder company stock has been bouncy in the first couple of weeks in the portfolio. The market has been solid, and the recent strong economic news is also a benefit. Mortgage rates and home prices are likely to trend lower in the quarters ahead. There is a short supply and massive pent-up demand for new homes. Sure, the market and the stock can always bounce around in the near term, but the strong trends are highly likely to result in good performance for this stock over time. TOL also sells at a cheap valuation despite the strong YTD performance. BUY

UnitedHealth Group Inc. (UNH – yield 1.5%) – The health insurance behemoth stock had a nice move higher since July. But it has been a sideways slog in recent weeks. UNH stumbled earlier this month after reporting earnings that the market didn’t like. UnitedHealth shares plunged after the company’s forecasts for 2024 and 2025 fell short of investors’ expectations. The numbers are only slightly below what was expected, and this company tends to outperform forecasts. But the company cited higher medical expenses and stricter federal reimbursement levels for the shortfall. Other stocks in the industry are falling as well. We’ll see if the negativity lasts. BUY

Safe Income Tier

Alexandria Real Estate Equities, Inc. (ARE – yield 4.3%) – The subpar performance continues as this life science property REIT just bounces around to nowhere. REITs have had a great run over the past few months as interest rates head lower, but you wouldn’t know it from the performance of ARE. It has spiked higher over the past few weeks, but it has periodically done that only to pull back again. The stock was downgraded to a hold a few weeks ago. ARE will continue to be held in the portfolio for now because the market may be overreacting to the recent job numbers and Alexandria reports earnings this week. Hopefully, the results will be good and ARE can generate some kind of lasting traction from here. HOLD

NextEra Energy (NEE – yield 2.5%) – This utility that had been on fire for most of this year pulled back earlier this month. It makes sense. Utilities cooled as the anticipated stronger economy is reducing the level at which interest rates are expected to fall. Utilities were the best performing market sector YTD and were due to cool off. But interest rates are likely to trend lower in the quarters ahead and NEE had been a market-beating superstar before inflation and rising rates. In fact, NEE has been moving back toward the high. There is also growing anticipation of a steep acceleration in electricity demand in the years ahead. Renewable demand is expected to grow the most. BUY

USB Depository Shares (USB-PS – yield 5.1%) – The environment is still very good for fixed income despite the recent change in interest rate expectations. These securities love falling interest rates. And interest rates are at least not likely to trend higher and will probably move lower in the quarters ahead. Everything looks good for this high-yielding fixed-income security. It’s been through the worst bond market ever and now interest rates are trending down, and the price and total return is moving up. The position has returned over 32%. BUY

Vanguard Long-Term Corp. Bd. Index Fund (VCLT – yield 4.7%) – Ditto for VCLT. The long-term corporate bond ETF loves falling interest rates. The long-term bond ETF doesn’t have the upside leverage that USB-PS does. But the trend is likely to serve this security well over the next year. BUY

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