What to Watch For This Earnings Season

Another Super Bowl for inflation-watchers... Earnings season is back, too... The fifth item in the 'bottom is (probably) in' checklist... The expectations game... More from Dave Lashmet on cancer treatment breakthroughs... [Stansberry Research Logo] Delivering World-Class Financial Research Since 1999 [Stansberry Digest] Another Super Bowl for inflation-watchers... Earnings season is back, too... The fifth item in the 'bottom is (probably) in' checklist... The expectations game... More from Dave Lashmet on cancer treatment breakthroughs... --------------------------------------------------------------- It's that time (again)... It's another "inflation week." The newest consumer price index ("CPI") data are due out in the morning... via a government press release that has become a monthly Super Bowl for "official" inflation data watchers. What will the numbers show? I (Corey McLaughlin) can't say for sure, but if last month's round of consumer price data and the market's reaction were any indication, a few tenths of a percent of "surprise" could make for some quick trigger fingers on Wall Street. If inflation is above expectations (for roughly 8% annual growth), the knee-jerk response will be "Oh, no!" If it's lower than expected, then "Oh, yeah!" Traders at investment bank JPMorgan Chase advised clients this week that a "hot" inflation number above expectations could drop the S&P 500 Index by 5%... while anything below expectations might spark a 2% or 3% rally. In other words, the best bet might be to expect volatility... because many analysts and traders could react quickly. That's true even if the biggest takeaway is already largely set – that the Federal Reserve will keep raising interest rates to fight inflation anyway. Gasoline prices have relatively quietly been back on the rise the past month... That could push the inflation readings higher. But the housing market has been cooling off quick, too. That could push the data lower. The most important piece of data to parse might be the month-over-month rise or fall in inflation. That's because the current pace of inflation most directly determines if or when the Fed's incremental interest-rate hikes [could overcome inflation rates]( (then stop). But more folks will focus on the headline CPI number, which shows less relevant year-over-year comparisons. That's what happened today with another piece of relevant inflation data... Today, the Bureau of Labor Statistics published its monthly producer price index ("PPI")... This metric shows what manufacturers pay for raw materials and tends to be a leading indicator for inflation trends. The data for September showed a continued slower pace of price increases (of 0.4%), but that costs were also 8.5% higher from a year ago... As Stansberry NewsWire editor C. Scott Garliss [reported today](... Today's data marked the third consecutive monthly decline. It's also the slowest rate of growth since August of last year. And it continues a steady trend lower since the recent March peak of 11.7% growth. However, for Wall Street, the pace of the slide comes as a disappointment. Yes, the trend is moving in the right direction but institutional investors would like to see the momentum lower accelerate. Because they're concerned that the longer the numbers remain above trend, the more it will encourage the Federal Reserve to aggressively raise interest rates. And the more the central bank increases rates, the more it will weigh on the domestic and global economic outlooks. Higher interest rates on things like credit card and auto debt mean less disposable income to spend on all types of goods. Those changes will materialize in the form of lower revenue and profits for Corporate America. And that will weigh on the near-term outlook for the S&P 500 Index... Tomorrow evening, I will have a report on the latest CPI inflation read. And you can get the latest data and instant reaction by following our NewsWire team tomorrow as well. It's about that time (again) for another reason, too... Earnings season is about to begin. If it feels like "it's always earnings season," you're not entirely wrong. Thousands of publicly traded companies report their financials four times a year, which fills up the calendar quick. Traditionally, the mainstream financial media declares that a new earnings season begins with the big banks reporting their numbers. That happens Friday. The widely followed data will flow into the public in the weeks following, through the end of November. So over the next six weeks, you'll see a bunch of hard numbers and anecdotes about businesses' bottom lines and customers' spending patterns. This will be another way to gauge the impact of inflation on individuals and the economy. And depending on what is revealed, stocks could swing wildly – for better or worse – as Wall Street analysts adjust their expectations for companies' future earnings. This happened earlier this year, when Netflix (NFLX) and the company formerly known as Facebook, Meta Platforms (META), plunged 20% in one day following earnings announcements that showed slowing growth. You might think that these sorts of things have been "priced in" to stocks long ago. But many institutional firms and investors can act as if they're the last to know, pulling the trigger on valuation decisions only when new earnings numbers are official. That's why you read headlines about big price movements each earnings season, as investors react to new price-to-earnings realities. Then casual traders throw their greed or fear in the mix, adding to the price movement, up or down... The result is that despite the presence of trend-followers, "meme stock" traders, and technical analysts at work today, companies' fundamental earnings still matter. To this point, they are at the heart of the fifth item on my "bottom is (probably) in" checklist... The game of expectations... Frankly, we don't share deep fundamental analysis frequently in the Digest. That's largely because we're tracking big-picture themes and don't make formal recommendations, like our analysts and editors who write our newsletters and advisories. In this case, though, I'm talking about a simple fundamental of the broader market, which falls into our ongoing discussion about the path of U.S. stocks. One question keeps hitting me in the head when I think about the upcoming earnings season... Specifically, should we expect U.S. stocks to "bottom" if they are still relatively overvalued based on future expectations? To me, the short answer is "probably not." They'd have room to fall further for prices to meet with expected future earnings. To explain myself fully, I'm going to show you some price-to-earnings (P/E) ratios of U.S. stocks, as measured by the benchmark S&P 500. As I write today, U.S. stocks are at least slightly overvalued based on fundamentals. They're not outrageously overvalued, but a little. We can see this by looking at the S&P 500's current P/E ratio and expectations ahead. Since the stock market is forward-looking, we want to compare future expectations with current realities... You can use various valuation metrics, but we'll go with a simple, straightforward one. As of last Friday, the most recent update available from Birinyi Associates' weekly P/E estimates update, the forward 12-month Wall Street consensus P/E ratio for the S&P 500 is 16.3. So, shares of the S&P 500 companies are trading at roughly 16 times future earnings – the share price is about 16 times greater than their earnings per share ("EPS") for a given one-year period. (For reference, this time last year, they were trading at 30.7 times earnings. That was really overvalued.) Now, let's look at the S&P 500's current P/E ratio, which by convention accounts for the trailing 12 months of earnings. The index checks in at roughly 18 times earnings – also not too extreme, but a little higher than future expectations. In other words, if things go the way Wall Street is expecting with earnings over the next six weeks, stock prices have a little further to fall. Otherwise, they wouldn't align with forward P/E expectations of roughly 16 times earnings. The difference between the S&P 500 trading at 18 times earnings today (around 3,600) and 16 times earnings (which would be 3,200 at current earnings) is about 10%. In other words, the U.S. benchmark for stocks could easily fall 10% based only on current fundamentals. But earnings season can change everything... The earnings part of the equation here is a moving target. What companies report over the next six weeks will matter a great deal. If companies' earnings generally come in below current expectations, stock prices could have even further to fall. That's because if Wall Street expects less earnings, that would push up the market's P/E multiple, making stocks even more overvalued relative to earnings unless prices fall. Scott explained this dynamic in response to a subscriber question earlier this year... That means the S&P 500 Index needs to drop even further to get the multiple lower. During the financial crisis, one of the biggest problems was exactly this, a multiple that kept going up as earnings estimates were cut. As the market became more expensive, Wall Street kept selling stocks until the multiple got cheap enough to invest. This is the kind of negative feedback loop that can be created from higher inflation and lower profits... Earnings power shrinks because the cost for everything rises and businesses and households spend more on less. Conversely, if earnings beat expectations, that would mean the S&P 500 needs to rise to meet a lower P/E ratio. This is sort of what happened last earnings season... despite the negative feedback loop that several of us at Stansberry Research (including me) would not have been surprised to see. As [we wrote in the August 11 Digest]( energy companies' gigantic profits overshadowed the struggles in the S&P 500's other major sectors and businesses in the second quarter... The profits from major energy companies like ExxonMobil (XOM) and Chevron (CVX) have really lifted the overall numbers of the market this earnings season... These companies benefited from higher gas prices in the second quarter, of course. The energy sector is reporting the highest earnings growth of all 11 major sectors at 299%... a year-over-year increase of $47.7 billion compared with the overall S&P 500's aggregate year-over-year earnings increase of $31.1 billion. If you strip out energy companies from this earnings season, the story's a lot different. As FactSet reported today... If the energy sector is excluded, the S&P 500 would be reporting a year-over-year decline in earnings of 3.7% rather than a year-over-year increase in earnings of 6.7%. Not only that, but companies that happened to beat earnings expectations were seeing their share prices jump higher than normal. Maybe this happens again, maybe it doesn't. But we'll be watching. Here's some historical context to consider, too... Regular readers might recall us mentioning the Shiller P/E ratio a few times. This metric adjusts valuations for inflation. Today, it checks in at around 27... down from a sky-high 37 at the start of the year, but still historically well above average. In many market bottoms, the S&P 500 didn't stop falling until the index's 12-month forward P/E dropped to somewhere between 13 and 14. The S&P 500 bottomed with a P/E in that range at the end of the dot-com bust in 2002... and in the COVID-19 panic. At today's levels, if the S&P 500 dropped to a P/E of 13 or 14, its value would be between 2,600 and 2,800. That's about 22% to 27% lower than today's close for the U.S. benchmark. But don't run and hit the sell button on everything right now... Remember, these numbers are based on the prior 12 months of S&P 500 companies' earnings and current future Wall Street expectations. Earnings season begins in just a few days. Those current expectations won't matter for long. Lastly, we have another dispatch from our colleague Dave Lashmet... [Yesterday]( Dave wrote to you about the breakthroughs happening in cancer treatment research... and the investment opportunities that have yet to be discovered by Wall Street. Today, he shares some more background, starting with a cautionary tale. Dave takes things from here... The story of Dax Cowart... In 1973, Dax Cowart was a 25-year-old U.S. Air Force Reserve pilot working with his father, a cattle rancher and real estate broker. They were looking at land to buy in Texas when they unknowingly came across a leaky propane pipeline. Unlike natural gas, propane is heavier than air. So it pools... as it did in the creek bed near where Dax and his father parked while inspecting a property. If propane sparks, it explodes and burns. And that's what happened when they started their car. Dax was showered in glass from the explosion. Trees and bushes burned around him. He managed to escape the car and ran through three walls of fire, and a mile and a half, to get clear of the burning gas. Dax was burned everywhere except the bottoms of his feet, and his dad died en route to the hospital. But I bring up this story not to warn you about the hazards of propane – though this story should serve as a cautionary tale – but to discuss Dax's contribution to patients' rights. Dax survived, but he underwent 14 months of painful surgeries. He lost both hands and both eyes. And he wrote afterward he was "forcibly treated" in the hospital with excessive procedures, all with limited access to painkillers. He told doctors he would rather die and asked for a lawyer. The hospital refused him on both counts. Eventually, Dax started a quiet revolution in patients' rights... He became a lawyer himself – and an advocate for patients' rights. He argued that patients should have more say in what treatments they receive, or whether they receive them at all... and they ought to hear about potential side effects. Among other things, Dax's fight had effects that extended far beyond burn victims. As much as any science or technology, greater patient rights and knowledge revolutionized cancer treatments... and helped create the world of modern cancer surgery we know today. Like I told you yesterday, cancer is the No. 1 or No. 2 killer of Americans most years. Plus, cancer targets mostly older folks, as their immune systems age. This also means it's one of the most expensive diseases to treat. But here's the good news: Despite an aging U.S. population, cancer deaths are falling in the United States, thanks to 50 years of improving cancer treatments. And surgery is definitely part of this. For starters, minimally invasive cancer surgery is the new norm... If a cancer is right on the surface or the tumor is huge, then open surgery can be useful. But in most cases, minimally invasive surgery is the way to go – for a patient's best quality of life. See, "minimally invasive" means that surgeons make three small cuts in a patient, and perhaps a small incision to remove the tumor mass... It isn't open surgery with a doctor's hands moving around inside the patient's body. Instead, doctors use a cutting tool at the end of a twistable cable, another flexible cable holding a light source and camera, and an empty pipe for suction and/or irrigation. Basically, the area of surgery is only where the tumor is... not everything else in its path. So there's less pain, fewer pain meds, fewer days in a hospital bed... All in all, it's vastly better for the patient. I imagine that Dax – who died in 2019 at age 71 of leukemia and liver cancer – would have favored this type of approach. Granted, minimally invasive surgery can take more operating-room time. Surgeons must work more slowly when they're maneuvering tools in such close confines rather than opening up the patient's body to reach right in by hand. But any surgeon trained in minimally invasive techniques almost always uses them. Except in extreme cases, minimally invasive surgery is better for you and for the total cost of your hospital stay. Plus, it improves survival outcomes in cancer surgery. The reason is your immune system... Operating rooms always have bacteria: in the air, on the table, even on the surgical instruments. And the larger your exposure to infectious agents, the more your immune system has to fight – at the same time it's trying to find any stray cancer cells the surgeon missed. What's more... an operating room infection is much more "alien" to your immune system than a cancer cell. So the leftover cancer cells get overlooked by your immune system and start growing again. The trauma of surgery also means you need to do a lot more self-knitting: You grow scar tissue, which also needs a new blood supply. While that all happens, the immune system's attacking force stays out of the way. If a single leftover cancer cell finds this new, rich real estate... well, again, these are perfect conditions for cancer growth. This brings me to the breakthroughs in cancer surgery... You can see why minimally invasive surgery can be critical for cancer patients. And precision tools for surgeons are key to successful outcomes. On this front, surgical devices have been shrinking and, as you probably know, TVs have been getting bigger. That's because the squares that make up the digital image – the picture elements (or "pixels") – have been getting smaller. This makes for high-resolution displays... new tech that has also made it to the operating room. The key innovation was adding two screens to a pair of hand-held joysticks. The two screens allow a 3D image to replicate the surgeon's eyes, giving true depth perception. Meanwhile, the joysticks connect to minimally invasive surgical tools... but surgeons have full use of their hands for the delicate twists and ties to make cutting successful. It's microsurgery despite big clunky human hands. All this is called 'robotic surgery'... But this gives robots too much credit. At best, they are translators. It's still manual dexterity – and surgical planning – that matters. A new study from Naples, Italy compared hand-operated minimally invasive cancer surgeries with robot-assisted procedures. Researchers concluded that the robotic assist reduced complications by a factor of two. It's these complications – bleeds, accidental cuts, and infections – that destroy quality of life or flat-out kill you on the table. So, that's where cancer surgery has gone over the past decade. What comes next is minimally invasive surgery without cutting... Instead, it's called "ablation." This approach uses either heat or cold directly on the tumor to differentially kill the tumor (and heat or cool the tumor margin) but leave the rest of the body intact. This approach means surgeons don't need to open up a path to remove your tumor. It also leaves dead tumor material for your immune system to sort through, which is better for you than it may sound. With so much material in your body, your immune system learns how to fight any stray cancer-cell seedlings. And it's not busy fighting infections from a different type of surgery. I'm giving you this overview of cancer surgery so you'll see that there are a lot of great things happening in this space. Surgery helps in the fight against cancer. And I have recommended my Stansberry Venture Technology subscribers buy shares of companies that help doctors do the kind of procedures I have just described. But we can still do better... The trouble is, surgery still relies on a surgeon's eyes. And if a tumor is too small for a surgeon to see, it's too small to cut. And, unfortunately, advanced stage 4 cancers are lethal because they are spreading. And they always start small at the level of a single cell. So, to defeat cancer, we can't use only surgery... We also need treatment approaches that hit every cancer seedling. And this frontier is facing a near-term revolution. So that's the medical technology I'm tracking for investors now. As I wrote yesterday, developments in genetics, targeted therapies, and this brand-new frontier of treatment show immense promise – and profit potential. In fact, as I said, in less than two weeks, a major announcement will likely make for big headlines on this very topic and could force a wave of money into a handful of mostly unknown companies. [If you want to learn more, click here right now](. In a new presentation, I talked with Scott, our NewsWire editor, about these emerging trends in cancer treatment and the opportunities for the companies at the cutting edge of their development. As I said yesterday, the world doesn't even know these breakthroughs are coming yet, which makes for a great investment opportunity for folks who are aware of them today. I detailed them in a new report for Stansberry Venture Technology subscribers [here](. If you want all the details, be sure to check out [my latest presentation with Scott]( right now. Don't Ignore These Four High-Paying Dividend Stocks In the latest episode of Making Money, Stansberry Research senior analyst Matt McCall takes a look at some big income players in the market right now. With inflation high and stock prices going lower, he says to consider adding them to your portfolio today... [Click here]( to watch or listen to this episode right now. And to catch all of Matt's shows and more videos and podcasts from the Stansberry Research team, be sure to [visit our Stansberry Investor platform]( anytime. --------------------------------------------------------------- Recommended Links: # [Move Your Money BEFORE October 23]( A major announcement on that day could force a wave of money into THREE companies. Their exclusive patents could soon be worth up to $150 billion... and lead to multiple gains up to 400%, no matter what's happening in the market. [Read the urgent story here](. --------------------------------------------------------------- # [Be 'in the Room' With Stansberry's Best Editors]( Our 20th annual conference is just around the corner, and you can watch the whole thing from the comfort of your home with our livestream pass. See and hear all the presentations (and stock picks) with your discounted livestream ticket. [Get your ticket before they're gone](. --------------------------------------------------------------- New 52-week highs (as of 10/11/22): Northrop Grumman (NOC), Texas Pacific Land (TPL), and short position in iShares Russell 1000 Growth Fund (IWF). In today's mailbag, more thoughts on one of the biggest present-day market dilemmas... and feedback on the Federal Reserve... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com. "Because equities in U.S. markets are denominated in U.S. dollars, they are down some 20%+ in nominal U.S. dollars only. But just like cash, they are also losing ground to inflation. Equities are not helpful in fighting inflation unless they produce a total return higher than inflation plus taxes..." – Paid-up subscriber Antonio S. "Anyone who thinks the Fed knows what it's doing is drinking the Kool-Aid. Purely reactionary. If the Fed was capable of fixing inflation they wouldn't let it happen in the first place. Meanwhile folks who have saved and invested for their future get screwed..." – Paid-up subscriber Nick P. All the best, Corey McLaughlin with Dave Lashmet Baltimore, Maryland and Bainbridge Island, Washington October 12, 2022 --------------------------------------------------------------- Stansberry Research Top 10 Open Recommendations Top 10 highest-returning open positions across all Stansberry Research portfolios Stock Buy Date Return Publication Analyst MSFT Microsoft 11/11/10 803.5% Retirement Millionaire Doc ADP Automatic Data 10/09/08 802.6% Extreme Value Ferris MSFT Microsoft 02/10/12 688.3% Stansberry's Investment Advisory Porter HSY Hershey 12/07/07 536.9% Stansberry's Investment Advisory Porter ETH/USD Ethereum 02/21/20 470.3% Stansberry Innovations Report Wade AFG American Financial 10/12/12 405.7% Stansberry's Investment Advisory Porter WRB W.R. Berkley 03/16/12 381.1% Stansberry's Investment Advisory Porter BRK.B Berkshire Hathaway 04/01/09 374.0% Retirement Millionaire Doc TPL Texas Pacific Land 11/05/20 317.6% Stansberry's Investment Advisory Porter FSMEX Fidelity Sel Med 09/03/08 276.4% Retirement Millionaire Doc Please note: Securities appearing in the Top 10 are not necessarily recommended buys at current prices. The list reflects the best-performing positions currently in the model portfolio of any Stansberry Research publication. The buy date reflects when the editor recommended the investment in the listed publication, and the return shows its performance since that date. To learn if a security is still a recommended buy today, you must be a subscriber to that publication and refer to the most recent portfolio. --------------------------------------------------------------- Top 10 Totals 5 Stansberry's Investment Advisory Porter 3 Retirement Millionaire Doc 1 Extreme Value Ferris 1 Stansberry Innovations Report Wade --------------------------------------------------------------- Top 5 Crypto Capital Open Recommendations Top 5 highest-returning open positions in the Crypto Capital model portfolio Stock Buy Date Return Publication Analyst ONE-USD Harmony 12/16/19 1,141.8% Crypto Capital Wade ETH/USD Ethereum 12/07/18 1,128.3% Crypto Capital Wade POLY/USD Polymath 05/19/20 1,083.1% Crypto Capital Wade MATIC/USD Polygon 02/25/21 834.0% Crypto Capital Wade BTC/USD Bitcoin 11/27/18 407.4% Crypto Capital Wade Please note: Securities appearing in the Top 5 are not necessarily recommended buys at current prices. The list reflects the best-performing positions currently in the Crypto Capital model portfolio. The buy date reflects when the recommendation was made, and the return shows its performance since that date. To learn if it's still a recommended buy today, you must be a subscriber and refer to the most recent portfolio. --------------------------------------------------------------- Stansberry Research Hall of Fame Top 10 all-time, highest-returning closed positions across all Stansberry portfolios Investment Symbol Duration Gain Publication Analyst Nvidia^* NVDA 5.96 years 1,466% Venture Tech. Lashmet Band Protocol crypto 0.32 years 1,169% Crypto Capital Wade Terra crypto 0.41 years 1,164% Crypto Capital Wade Inovio Pharma.^ INO 1.01 years 1,139% Venture Tech. Lashmet Seabridge Gold^ SA 4.20 years 995% Sjug Conf. Sjuggerud Frontier crypto 0.08 years 978% Crypto Capital Wade Binance Coin crypto 1.78 years 963% Crypto Capital Wade Nvidia^* NVDA 4.12 years 777% Venture Tech. Lashmet Intellia Therapeutics NTLA 1.95 years 775% Amer. Moonshots Root Rite Aid 8.5% bond 4.97 years 773% True Income Williams ^ These gains occurred with a partial position in the respective stocks. * The two partial positions in Nvidia were part of a single recommendation. Editor Dave Lashmet closed the first leg of the position in November 2016 for a gain of about 108%. Then, he closed the second leg in July 2020 for a 777% return. And finally, in May 2022, he booked a 1,466% return on the final leg. Subscribers who followed his advice on Nvidia could've recorded a total weighted average gain of more than 600%. You have received this e-mail as part of your subscription to Stansberry Digest. If you no longer want to receive e-mails from Stansberry Digest [click here](. Published by Stansberry Research. You’re receiving this e-mail at {EMAIL}. Stansberry Research welcomes comments or suggestions at feedback@stansberryresearch.com. This address is for feedback only. 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