What Really Matters This Earnings Season

Tuning Out the Earnings-Season Noise

“Earnings season is the most interesting time of year. It brings out the best and the worst in the markets,” says Enrique Abeyta — hedge fund veteran and the newest member of the Paradigm Press team.

“On the worst side, you see heightened volatility in many stocks. The vast majority of the time, this volatility results from ‘noise’ especially to the downside.

“Very often, when stocks get hit hard on earnings, it is not because of a major change in the fundamentals. Rather, it results from a small miss on a particular metric.”

The media love to fixate on a company missing the vaunted Wall Street analyst estimates by a penny or two.

“This,” says Enrique, “is why you see such big moves on very little change in a stock’s fundamentals: negative media coverage. Once you understand this, you can find moneymaking opportunities heavily skewed in your favor.”

With all the big banks having reported their numbers in recent days, we’re now headed into the “meat” of earnings season — dozens of S&P 500 companies will weigh in starting tomorrow.

On Wednesday, Tesla will report — the first of the “Magnificent 7” companies to do so. Five more of the Mag 7 will follow next week.

As the Mag 7 goes, so goes the market: “These companies make up more than 31% of the market capitalization of the S&P 500,” Enrique reminds us.

What to expect? “Recent results are the best predictor of what will happen next with companies,” he goes on — especially huge ones with massive competitive moats like these companies.

Enrique pored over recent reports for all seven of these companies. His conclusion: “There is a reason these names have powered the stock market higher.

“Other than TSLA, these companies have been consistently beating numbers and seen positive earnings revisions. A few of them — NVDA and META — have absolutely blown away the numbers. As a group they have seen strong positive earnings revisions.

“My experience over three decades as a professional investor is that large companies with long and consistent track records of beating numbers will continue to beat numbers.”

And if the Mag 7 continue to beat numbers, that bodes well for the rest of the S&P 500.

What Really Matters During Earnings Season

Here’s something that will prove even more valuable over time as we head into the thick of earnings season: “What if I told you,” says Enrique, “there was only one single metric you need to know to trade stocks?”

It’s true. He learned the hard way, slogging through dozens of useless ones for the better part of two decades. At the end of that process, he discovered only one data point really matters.

And no, it’s not the price-earnings ratio. Indeed, he says valuation has nothing to do with it.

“Not once in the stock market's history has a stock gone up just because it was ‘cheap,’” says Enrique.

The real key is earnings growth.

“Even Warren Buffett, the greatest value investor of all time, understands this,” Enrique adds — drawing on the example of a famous Buffett stock, Coca-Cola.

“Buffett bought his stake in KO back in 1988,” he reminds us. “That original $1.3 billion investment is now worth almost $25 billion!” The share price has appreciated 2,193%.

Here’s the thing: KO was not a value stock in 1988. It was trading for 16 times earnings — actually more expensive than the S&P 500, which was about 14X earnings at the time.

Today, KO trades for about 25X earnings — a 56% increase in the valuation. But that drove only a small part of the returns.

“The real driver was the earnings!” says Enrique. “Over the period, they’ve gone up almost 2,400% and powered the stock price higher.

“If the stock hadn’t grown earnings like it has, I don’t think it would have done very well for Buffett and other investors. It wasn’t the valuation that made KO a fantastic stock — it was the EARNINGS GROWTH.

“Earnings growth is the one single metric that always works,” Enrique concludes.

“If you find a company that’s going to grow EPS from $1 to $10, then that stock is going up. It’s that simple!” Maybe not right away, and maybe not by a lot. “But I guarantee you the stock is going higher.”

With that in mind, what does he like right now? “In my trading strategies, I look for stocks with solid growth that have stumbled — names such as Meta Platforms (META) and Nvidia (NVDA). This presents a greater chance that they will rally.

“In my investing strategies, I look to identify stocks with huge growth — think Talen Energy (TLN) and Cava Group (CAVA). Find those, and you can find stocks that are 20-baggers like KO.”

If you’d like more insights like these, we encourage you to sign up for our new Truth & Trends e-letter where Enrique and chart hound Greg Guenthner will up your trading game every weekday. Sign up here and look for new issues Monday–Friday at 8:00 a.m. Eastern.

Dollar Demolition Summit This Week

Lost in the noise of the election and the Ukraine/Israel wars is this — “the rise of the new BRICS currency and its potential role in the global monetary system,” says Paradigm macro maven Jim Rickards.

Tomorrow, leaders of the BRICS nations gather for their annual summit in Kazan, Russia. The core five members of Brazil, Russia, India, China and South Africa will be joined by last year’s additions — Iran, the United Arab Emirates, Ethiopia and Egypt.

“This meeting will include announcements moving the BRICS currency plans forward in material ways,” Jim tells us. “Members will announce significant progress in building out secure payment channels and admitting new members, which will drive the group closer to the critical mass needed to launch a currency union.

“A new BRICS currency is coming soon in the role of a payment currency. This could be a big deal as it will mean the U.S. dollar will have a reduced role in total global payments. However, it will take longer for the BRIC to become a threat as a reserve currency as it takes time to build out the infrastructure needed to support it.

“But a linkage of the new BRICS currency to gold could accelerate that process. Members of the BRICS currency union could use a surplus of the new currency to buy gold bullion to hold in their reserves. When needed for purchases or settlements, gold could be easily sold in the BRICS currency.

“The common thread in these and other solutions is that they hinder U.S. dollar transactions. That’s the point. And that is why central banks of many BRICS members have been buying so much gold in recent months.”

That said, the leader of the host nation is trying to tamp down expectations.

On Friday, Russian president Vladimir Putin met with media from BRICS member nations. “At this point of time,” he said, “it [a BRICS currency] is a long term prospect. It is not under consideration.

“BRICS will be cautious and act gradually, move slowly. The time has not come yet.”

What is on the table, he said, are more intermediate steps. As reported by The Economic Times in India, “Putin said these countries should focus on the use of the national currencies, new financial instruments and the creation of an analogue of SWIFT.”

SWIFT is the international messaging system that greases the gears of global payments. It’s based in Brussels, but Washington ultimately calls the shots. Many Russian financial institutions were shut out of SWIFT after the invasion of Ukraine in 2022.

While Russia has withstood Western sanctions far better than Western leaders anticipated, Moscow nonetheless wants to spin up a SWIFT alternative sooner rather than later. China and Iran would likely be on board with such a scheme.

“When leaders of the BRICS agglomeration meet this week,” sums up The Economic Times, “the dominant theme would be how to ringfence themselves from the financial missiles the West fires to settle political scores.”

More to come as the week goes on…

Bitcoin Breakout

“It looks like Bitcoin is edging toward a major breakout,” says Paradigm chart hound Greg Guenthner.

“It started firming up late Sunday, holding above $69K. This is just below the last true attempt at a $70K break in May/June. Other cryptos were also starting to move as we wrapped up the weekend. Ethereum is dangerously close to breaking out of an inverse head and shoulders. Smaller cryptos are up and running.

“Is this the beginning of a bigger breakout in the making — and the next leg of a Bitcoin run to 100K? I think this might be the case.”

Yes, the flagship crypto has pulled back below $67,000 for the moment. “Don’t discount a shakeout or two before Bitcoin actually decides to activate its booster rockets and extend into the $70K range — and beyond,” Greg says.

Here’s how he drew it on a chart Friday…

“If and when Bitcoin does extend higher, $100K is a downright reasonable price target for late December into early 2025.” You heard it here first.

Then again, maybe you just rely on the “McRib” indicator? The wags at the TradingView site posted the following…

It’s at this moment we’ll remind you correlation does not equal causation…

As for more conventional markets, stocks and bonds are both pulling back to start the week.

At last check the S&P 500 is down nearly two-thirds of a percent from Friday’s record close of 5,864. Meanwhile, falling bond prices translate to higher yields; the yield on a 10-year Treasury note is up to 4.16%, the highest since late July.

Crude has pushed a buck higher, back over $70. Precious metals tried to start the week extending Friday’s rally… but at last check gold is little changed from the end of last week at $2,722. Likewise for silver at $33.69.

You Spoke, We Listened

After we reopened the “long boring videos” can of worms last Thursday, we got a flood of feedback…

“The videos that you send out for something new are too long. Most of us know the backgrounds of the people involved and we don’t like to hear stuff repeated over and over. So if you could allow a short and long version or give the ability to skip some things, that would be great. Also, sometimes we get interrupted and ultimately have to restart from the beginning.”

“Stop the long-a$$ sales videos! Ugh!” says one of our longtimers “It’s like trying to get attachment through Stockholm syndrome with hours of captivity!

“I agree with the reader who commented on your own piece about the torrential flow of information. I research/read 10 hours per day about investing ideas. I just ignore the videos. Simply no time.”

Adds a third: “I am a sales guy and get the ‘tell to sell’ — however I am an old guy who likes to read. How about a transcript of the videos I can print out and stuff in my briefcase and read whenever I want? Still long form.

“And yes, I just spent an eternity watching Rickards’ long ‘live from the gold mine’ video and yes, he extracted another two grand from me, but I think it will be worth it!”

Dave responds: In case you missed it during our weekly Paradigm Press Concierge email today… we are implementing several changes after our executive publisher Matt Insley solicited reader feedback last week.

We’re already paring back the number of emails we’re sending. And over the next week, we’ll offer a transcript option with all of our sales presentations.

As I said on Thursday, we’re always going to have something to sell because that’s the nature of our business model. But your feedback is being heard.

Sometimes less is more: Our fervent hope is that measures like fewer emails will translate to greater customer loyalty. That’s a win-win all around…

Best regards,

Dave Gonigam
Managing editor, Paradigm Pressroom's 5 Bullets