Day: November 16, 2024

The earnings outlook for all of 2025 has barely budged even as analysts have raised third-quarter estimates. Wall Street sees S&P 500 companies earning around $274 per share next year, slightly below projections of roughly $277 a year ago, according to data compiled by BI.

“As we approach the beginning of the new year, you tend to see a bias to more realistic expectations,” said Matt Lloyd, chief investment strategist at Advisors Asset Management. “Combined with Fed comments about not seeing a clear rate-cut path, the headwinds become more realistic.”

Since mid-October, analysts have lowered year-ahead projections by the most for energy and materials companies as crude prices slump, BI data show. Excluding energy, which skewed estimates due to lower commodity prices and ebbing inflation, S&P 500 earnings are forecast to grow by about 11% year-over-year in the third quarter.

All told, S&P 500 profit growth is forecast to climb 15% annually in 2025, up from estimates of 8% this year. The problem, though, is that the index’s earnings recession that concluded last year was long but relatively shallow, which could open the door to a smaller profit expansion than stock bulls hope in the coming years.

From peak to trough, the S&P 500 posted a 13% EPS contraction for its three-quarter earnings recession that ended last year, when viewed on a trailing 12-month basis, data compiled by BI show. That’s well short of the median 26% peak-to-trough drop since the late 1960s.

Companies will need to post sturdy profit growth and strong outlooks for next year to sustain and justify rich valuations that have propelled the S&P 500 above the 6,000 milestone in recent months. At 22 times future 12-month earnings estimates, the index’s valuation is well above its long-term average of 18.4 over the past decade.

“Fewer rate cuts might put pressure on what are otherwise lofty earnings expectations over the next several quarters,” said Adam Phillips, managing director of portfolio strategy at EP Wealth Advisors.

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Some investors are looking for consistently large returns quarter over quarter and only care about the GLP-1 drugs.

“No one even asks a question outside of obesity on the Lilly or Novo [earnings] conference calls. And they both have a bunch of other things going on,” Holz told Yahoo Finance.

Lilly is one of two market leaders in the space, along with Novo Nordisk (NVO), and could be the first $1 trillion healthcare company by market cap.

It’s why, despite having a diverse portfolio of products — including one of only two new Alzheimer’s drugs on the market — the weight-loss drug Zepbound and diabetes drug Mounjaro are weighing more heavily on the stock. And misses of those two products are triggering Wall Street action.

Goldman Sachs analyst Chris Shibutani believes that while Lilly may not ever reach $1 trillion, it has outperformed for two, and potentially three, years in a row despite the volatility.

“That’s also a pretty exclusive club, where a stock manages, for three years in a row, to outperform its peers,” Shibutani said.

Citi’s Meacham pointed out that some investors may only be holding Lilly and no other healthcare stocks. “The reason I think you saw such a huge move is that there are a lot of investors that … may only own one healthcare stock, and that’s Lilly,” Meacham said.

Goldman Sachs’ Shibutani similarly noted more general investors have a “FOMO” (fear of missing out) mindset impacting the stock.

He noted that there are two categories that have invoked that feeling for the past few years: artificial intelligence and obesity.

It’s “a bit of zeitgeist, sort of a cultural phenomenon,” Shibutani said.

Holz also noted that there could be more volatility ahead for GLP-1s.

“These things kind of tend to trade with a zero-sum game — rightly or wrongly,” he said.

Yahoo Finance editor Jared Blikre contributed to this report. Follow him @SPYJared.

Anjalee Khemlani is the senior health reporter at Yahoo Finance, covering all things pharma, insurance, care services, digital health, PBMs, and health policy and politics. That includes GLP-1s, of course. Follow Anjalee on most social media platforms @AnjKhem.

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Lesson learned: Don’t underestimate Amazon. It has incredible momentum right now, and its AI platform is the wave of the future. You can buy the stock right now at close to its cheapest valuation in a long time, and if you hold it through the inevitable short-term ups and downs to come, you should be well rewarded in the long term.

Jeremy Bowman (Ulta Beauty): Earlier this year, Berkshire Hathaway bought shares of cosmetics retailer Ulta Beauty for the first time, and in many ways, it looks like a classic Buffett stock.

Ulta is a clear leader in its niche, with more than 1,400 stores around the country — not including its roughly 800 store-in-store venues at Target locations — rivaling peer Sephora. However, the stock has pulled back this year as the company’s sales growth slowed, offering investors an opportunity to get into this longtime winner at a discount.

While Ulta’s business may be maturing, the stock still has growth potential. Interest rates are predicted to come down, which in turn is expected to improve consumer confidence — and that should help propel a rebound for Ulta and its stock. Additionally, at its recent Investor Day conference, the company revealed that it intended to accelerate the pace of new store openings, with a more ambitious long-term goal of growing its footprint to more than 1,800 stores. It’s also seeing strong adoption of its loyalty program, which it expects to reach 50 million members by 2028.

As a business, Ulta also enjoys a number of competitive advantages. Most of its full-line stores feature hair salons, which gives customers an additional reason to visit them. That’s also a service that e-commerce rivals can’t provide. Moreover, its stores are much larger than other pure-play beauty retailers — essentially, they’re superstores that carry a wide range of products and brands, making Ulta a one-stop shop for beauty shoppers.

Right now, Ulta offers investors an excellent value at a price-to-earnings ratio of 15, and the company plans to aggressively buy back stock under the new $3 billion share repurchase program it announced last month. It’s not a surprise that Berkshire Hathaway took advantage of the stock’s discount to pick up shares.

John Ballard (American Express): American Express has been a staple of Berkshire Hathaway’s portfolio for more than 30 years. Its strong growth this year speaks to why Buffett continues to hold its shares.

American Express has a solid business strategy of using cardholder perks and special offers to attract new customers who, in turn, will regularly use their cards and generate merchant fees. This spending-centric business model should continue to thrive as the economy grows over the long term.

In the third quarter, revenue hit a new high, growing 8% year-over-year, and this top-line growth also fueled strong growth in earnings. Management raised its full-year revenue and earnings guidance, and now expects 2024 earnings per share of between $13.75 to $14.05.

Buffett places a high value on the financial company’s brand. The appeal of American Express is evident from its successes in winning over younger customers. Millennial and Gen Z consumers make up the company’s fastest-growing cohorts, providing 80% of new U.S. accounts it acquired for its gold card last quarter.

American Express shares trade at a price-to-earnings ratio of about 21, which is on the high side for a financial services business, but it’s still within the stock’s historical trading range. If consumer spending picks up, it could light a fire under cardholder spending. With analysts expecting the company’s earnings to grow at an annualized rate of 15% over the next five years, investors who buy the stock now could earn excellent returns.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. American Express is an advertising partner of Motley Fool Money. Jennifer Saibil has positions in American Express. Jeremy Bowman has positions in Amazon and Target. John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Berkshire Hathaway, Target, and Ulta Beauty. The Motley Fool has a disclosure policy.

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The company pays out a little more than 50% of its cash flow via dividends. It retains the rest to fund expansion projects and maintain its financial flexibility to opportunistically repurchase shares or make acquisitions. The company currently has more than $5 billion of commercially secured expansion projects in its backlog that will come online between now and the end of 2028. That gives it lots of visibility into its future cash flow growth. Meanwhile, it sees rich opportunities to continue expanding. It should have plenty of fuel to continue boosting its high-yielding dividend in the coming years.

At its current share price, Verizon (NYSE: VZ) yields more than 6.5%. The mobile and broadband giant has increased its payouts annually for 18 straight years, the longest current streak in the U.S. telecom sector.

The company is a cash-gushing machine. It has produced a whopping $26.5 billion in cash flow from operations during the first nine months of this year, easily covering its capital spending ($12 billion) and dividend payouts ($8.4 billion). It used the excess free cash to strengthen its already solid balance sheet.

Verizon is investing heavily in expanding its 5G and fiber networks, which should increase its cash flow in the future. Meanwhile, the company recently agreed to buy Frontier Communications in a $20 billion deal to further enhance its fiber network. That acquisition will also boost its earnings, driven by at least $500 million in cost savings. The company’s growth-related investments should enable it to continue increasing its dividend.

Realty Income, Kinder Morgan, and Verizon currently offer much higher dividend yields than the average stock in the S&P 500. They also have excellent records of increasing their payouts, and they seem likely to keep their streaks going. Because of that, they are great stocks to buy for income right now.

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The S&P 500’s Dividend Yield Is the Lowest It’s Been in Over 2 Decades. Here’s Where You Can Lock in Much Higher Yields. was originally published by The Motley Fool

AMD’s third-quarter sales jumped 18% year over year, driven by a 122% surge in the data center segment. That’s the division accounting for AMD’s Epyc and Instinct chips, which are used in AI servers.

In Micron’s recent fourth-quarter report, revenue rose 93% year over year. Again, the fuel for this fire was “robust AI demand” and soaring data center sales, the report said.

Both stocks look expensive if you focus on their reported results. AMD trades at 124 times trailing earnings and 145 times free cash flow. These metrics stand at 147 and 909, respectively, for Micron. So I get it if traditional value investors are staying away from these stocks.

But the chip experts are coming back from an extended downturn in the semiconductor sector, held back by a stubborn shortage of manufacturing capacity and the recent inflation crisis. Switching to a forward-looking perspective, AMD shares are changing hands at 27 times next-year earnings estimates, and Micron’s forward price-to-earnings ratio stops at 7.7.

So I think it’s a big mistake to write off Micron and AMD as overpriced growth stories. It just took some time to overcome recent back-end challenges and deliver robust bottom-line profits again. These AI stocks look tempting right now, and I highly recommend picking up a few shares while they’re cheap.

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Anders Bylund has positions in Intel, Micron Technology, and Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, Intel, and Nvidia. The Motley Fool recommends the following options: short November 2024 $24 calls on Intel. The Motley Fool has a disclosure policy.

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PayPal’s active accounts increased slightly in Q3, marking the first growth since first-quarter 2023. Transaction margin also ticked up — something it hasn’t done in a couple of years. These slight improvements helped PayPal’s revenue rise 6% year over year, which isn’t all that impressive. However, investors need to focus on profits with PayPal, as it isn’t a growth story anymore. Operating income was up 19% to $1.4 billion, which is outstanding.

With its cash flows, PayPal is repurchasing a ton of stock and retired 28 million shares in Q3 alone. With about 1 billion shares outstanding, that means PayPal retired nearly 3% of its shares in one quarter. Most companies would be happy if they could do that in a year, yet PayPal is doing it much faster. This is occurring for two reasons.

First, PayPal’s management devotes all of its cash flows to repurchasing shares. It can afford to do this because its balance sheet is in a healthy spot. Second, it’s a good idea because the stock is cheap. At the start of Q3, PayPal’s stock traded for around 12 times forward earnings and 14 times trailing earnings.

PayPal’s stock is no longer as cheap after the rally, so the repurchases will be less effective, but it still has plenty of room to run, considering that it’s still well below the S&P 500’s price tag.

I wouldn’t be surprised if PayPal’s rally continues to the end of the year, making it a great stock to purchase now.

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On rare occasions, our expert team of analysts issues a “Double Down” stock recommendation for companies that they think are about to pop. If you’re worried you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:

• Amazon: if you invested $1,000 when we doubled down in 2010, you’d have $23,818!*

• Apple: if you invested $1,000 when we doubled down in 2008, you’d have $43,221!*

• Netflix: if you invested $1,000 when we doubled down in 2004, you’d have $451,527!*

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Keithen Drury has positions in Alphabet and PayPal. The Motley Fool has positions in and recommends Alphabet and PayPal. The Motley Fool recommends the following options: long January 2027 $42.50 calls on PayPal and short December 2024 $70 calls on PayPal. The Motley Fool has a disclosure policy.

2 Stocks That Could Crush the Market in 2025 was originally published by The Motley Fool