In this edition of Market Factors we will start with the details on a shockingly good U.S. earnings season and then move on to the disastrous domestic condo market. The diversion outlines my love of foreign language TV and as always we’ll look ahead to important data releases.
Trader Chris Lagana works on the floor of the New York Stock Exchange, Monday, Aug. 18, 2025.Richard Drew/The Associated Press
EquitiesU.S. earnings were really, really good
Everybody seems to be in terrible humour for obvious orange-hued reasons but there is very little to complain about regarding profit growth. Yes it’s true that the S&P 500 is setting records for market concentration – the top five and top 10 companies account for 29 per cent and 40 per cent, respectively, according to Scotiabank strategists. But aggregate earnings growth and the outlook remain at odds with the incumbent mood.
Goldman Sachs chief U.S. equity strategist David Kostin detailed the good market news in his most recent Weekly Kickstart Report. He began by reporting that with U.S. earnings season almost done, 60 per cent of companies exceeded profit estimates by more than a standard deviation of analyst estimates.
Year-over-year earnings growth came in at 11 per cent compared with the four per cent analyst forecast.
Earnings reports are backwards looking but the view out of the windshield is just as rosy. Fully 58 per cent of companies raised full-year profit guidance, twice the number from the first quarter. The news from profit margins is good too. Management preserved net profit margins at the 12 per cent level by negotiating with suppliers and changing supply chains.
The elephant in the room is of course the Magnificent Seven stocks but, unlike the tech giants of the late 1990s, their profit growth goes a long way in justifying their stock prices.
Nvidia Corp. hasn’t reported yet but if it hits consensus estimates, the Magnificent Seven will have increased profits by 26 per cent year over year in the second quarter compared with an average of 7 per cent for the remaining 493 companies in the S&P 500.
I was aware that second quarter earnings were good but I was surprised by the strength in the details. For all the misguided economic policy and general political upheaval (the lack of response to the army and National Guard crossing the Rubicon into Washington D.C. was as big a surprise as earnings season), profit growth not only held up but dramatically exceeded forecasts.
Is this as good as it gets? I don’t know – that thought seems to extend the market pessimism that’s been misguided all along. On the other hand, I can’t say there’s no need to worry with U.S. markets not only highly concentrated but with valuation levels in the 90th percentile relative to history.
There are many times when the best thing to do is nothing and this seems like one of those times. Still, if stock prices head broadly south I won’t wait long to reduce risk with extra cash and cheaper stocks.
The Toronto skyline is seen on Monday, Aug. 5, 2024.Chris Young/The Canadian Press
Condo speculators get hurt
I own a condo in the increasingly dismal Parkdale neighborhood in Toronto (I like old buildings, that’s why I live there) so I wasn’t thrilled to see The Condo Crash in Macleans. This is not to say I have a ton of empathy for speculators who previously made housing more expensive, nor am I losing sleep over developers losing money on 450 square foot units.
The column details the trials of one investor that was encouraged by a realtor to put a 10 per cent deposit down on a $855,000 pre-build condo unit in Toronto’s wealthy Forest Hill area. The intention was to sell it at a profit before closing, not least because this investor didn’t qualify for a mortgage at a decent rate to buy it in full. To the extent this Montreal-based investor was roped into the deal as a sure thing I do feel some sympathy.
The condo market started imploding almost as soon as the investor handed over his life savings and subsidies from friends and family. As of closing, a buyer could not be found. The investor abandoned their deposit and the developer sold the unit for less than half of the pre-build price.
People get hurt when bubbles burst but my hope is that this is for the greater good. An economy needs affordable, decent-sized housing that allows new families to get on the lower rungs of the property ladder. Red hot, speculator-driven real estate markets prevent this. A less frothy housing market also allows for productive investment elsewhere that potentially improves broader standards of living.
DiversionsSubtitles for the win
I stream a lot of foreign language TV shows and this includes Traces from Scotland where subtitles are a must. Subtitles are always a must for foreign TV, which is exactly the point because I have to put my iPad down and actually concentrate on the show.
The Germany-based Dark on Netflix is probably the best foreign language show available and probably one of the best shows available in any language. I was also very happy to see that another season of Chestnut Man is in the works. The Danish show is grim and riveting and also on Netflix.
Detective Forst from Poland is also watchable in the same grisly way. The Finnish show Deadwind is a good whodunit and also hilarious because the sidekick turns out to have an amazingly unlikely skill near the end of every season that saves the day for the star Pihla Viitala’s character.
Zero Zero Zero is an Italian crime show on Prime worth watching. Le Bureau from France is terrific; it’s on the Paramount Network.
The show that really got me started on foreign TV was the French show Zone Blanche, which I absolutely loved. Unfortunately it’s no longer available anywhere for streaming. I am waiting for the French show Braquo to show up in different form on Prime – it is inexplicably only available dubbed into Spanish.
The essentials
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Globe Investor highlights
Shopify recently returned to the top of the TSX by market cap. David Berman suggests it may deserve to stay there
Private markets may be all the rage. But Tom Bradley finds some key reasons why public markets have a lot of advantages
Norman Rothery updates his Dividend Monster portfolio
What’s up next
Not a ton of data on either side of the border for the coming week. Domestically the big number is CPI for July on Tuesday, which economists forecast at 0.4 per cent month-over-month. This would translate into 1.8 per cent year over year. Retail sales data for June will be released on Friday and the consensus guess is a 1.5 per cent rise month over month.
There are no major domestic earnings reports as markets await the major bank results starting on the 26th.
South of the border we’ll get a preliminary look at manufacturing with the S&P Global manufacturing PMI report on Thursday. The leading economic index for July, also on Thursday, is expected to show a month-over-month decline of 0.1 per cent.
Corporate results include Medtronic PLC ($1.23 per share expected), Home Depot ($4.748) and Lowe’s Companies Inc. ($4.249) on Tuesday. Target Corp. ($2.01) reports on Wednesday and Walmart Inc. ($0.73) earnings will be reported Thursday.
See our full earnings and economic calendar here