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Data is everywhere. When orchestrated properly, it sings. At Morningstar, we analyze and enrich data, making it actionable and powerful for you. Morningstar, where data speaks,
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it's pretty otherworldly. I mean, you have, we're beating BY Something like 9% on the earnings that are, that are coming in. However, however you look at it, this is a, is this, this season is the really big deal.
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Hello and welcome to the Barren Streetwise podcast. I'm Jack Howe and the voice you just heard is Jonathan Gollop. He's the chief equity strategist at Seaport Research Partners, and in a moment he'll talk to us about corporate earnings season and whether it's any good. Spoiler alert. It's really, really good. We're going to hear about how long that can continue and what it means for stock prices. But first I'll say a few words about big food dividends and about psychedelic stocks. Psychedelic as in magic mushrooms and stocks as in why are there stocks for magic mushrooms? Let's get into it. Let's start with big food dividends and our thoughts and sympathy are with Mr. Peanut and Count Chocula because this is a difficult time for food stocks. Kraft Heinz was recently down more than 40% over the past three years, not counting dividends. General Mills, Campbell's, Conagra Brands, those were all down around 60% apiece. The S&P 500 has done well over that stretch. It's made 72%. As prices have fallen for food stocks, the dividend yields have plumped up. For the companies I just mentioned, they were recently 7 to 9%. This is normally where Kool Aid man would bust through the wall and say, oh yeah, and recommend putting aside some shares just for the income. But I wrote recently in Barron's that investors should be careful here before barreling in. There are several challenges facing these companies and it soon could get worse. There's inflation and there's stretched budgets for middle income shoppers and market share in grocery is shifting toward mass merchants that can play hardball on price. If you look at an ETF called State Street Consumer Staples Select Sector that has all those food names that we just mentioned and they're all doing poorly. But the fund has managed to eke out a gain over the past three years, and that's because its two largest holdings, Walmart and Costco, are way up. They were recently up 160% and 100% respectively over three years. But the big thing I want to mention, and we've talked a lot about it, is weight loss Shots and now pills from the same companies. There was one approved in December and another one just in April. The medicines themselves rolled news, but UBS argues in a recent report that the adoption of them is just getting started. There are a bunch of reasons to expect many more people to use these medicines soon. The pills will help with that. Prices are coming down and coverage is increasing. So UBS expects big uptake for these medicines through the end of the decade. There's studies that suggest that GLP1 users eat and drink around 30% less. Declines are not evenly distributed. Users stick with their sparkling water, but they drink a lot less booze, for example. You can see where this is headed. UBS predicts an aggregate hit to food and beverage demand and one that will be front loaded. They see a 1.2% decline this year, followed by 0.9% next year and 0.3% in each of the following two years. Those aren't big drops, but this is not a fast growth industry. Okay, now that analysis comes actually from packaging analysts at ubs. And they expect GLP wants to negatively impact companies like OI Glass and Graphic Packaging Holdings. They have exposure to beer and snacks, respectively. They say it just might help a player like Avery Dennison, which makes RFID tags for clothing. You lose weight, you might need new clothes. But we can imagine it could be a difficult stretch for Big Food too. Now turn your attention to a separate piece of analysis from BofA Securities. They point out recently that dividends for some Big Food names look stretched. There are a lot of ways to judge that sort of thing. You can compare payments with earnings and free cash flow. You can look at the target dividend policies for the companies. You should factor in debt levels and looming maturities and credit ratings and what credit agencies have to say about which way things are trending.
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And.
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And B of A does all of these. And they have a traffic light scale to measure the level of concern investors should have over cuts. B of A's red light stocks are conagra, Kraft, Heinz, General Mills and Campbell's. Yellow Lights. Hormel Foods, Mondelez International, Hershey, Lamb, Weston holdings and McCormick. That one agreed recently to combine with Unilever. And the company's in better shape, at least dividend wise. The green light stocks, those are Smithfield Foods, J.M. smucker, Tyson Foods and Oats Brands. Did we ever nail down how to pronounce that? Is it Oots? Is it Utz? I like to come somewhere in between, let's call it uhts, Utz Brands. And that is Food dividends. Who wants to talk psychedelics? I am not an expert on this subject. I've never gone on one of those self discovery trips that rich people go on where an Amazonian shaman administers hallucinogenic brew made from the ayahuasca vine. I did recently experiment with doubling up on atomic fireballs, but it's not the same thing. But if I did have a visit from a spirit guide, we'd probably talk about what's going on with these psychedelic stocks. I wrote around a week ago in Barron's about three companies. Atai Beckley. Atai Beckley. They're testing an ayahuasca ingredient for depression. That one was up 212% in a year. Compass Pathways. They're working on depression with a lab made compound of psilocybin. And that's the stuff found naturally in magic mushrooms. Do young people still use that term? These are not things found in the produce aisle. These are recreational drugs. That one was up 134%. And there's a company called Definium Therapeutics that is in late stage trials for LSD based pills to treat depression and anxiety. And they're looking into whether a form of the party drug Molly can help with autism. Molly must have a fancy scientific name, but I can't remember what it is. That stock was recently up 283% and together those three companies were valued at close to $6 billion. Factoring in share dilution and none has meaningful revenue. But there are high hopes for revenue closer to the end of the decade. The stocks, I should point out, are all down fairly significantly since I wrote about them. But I wouldn't want to have to predict which direction they'll head next in the short term. Oppenheimer is bullish. There is a new White House push to accelerate clinical reviews of psychedelics. And many of these medicines are aimed at patients for whom other treatments have failed. These include military veterans who suffer from post traumatic stress disorder. But there's a long history of recreational drugs falling short on promised medical breakthroughs. A decade ago, cannabis, which has long been used medically, for example to ease nausea in chemotherapy patients. It was the subject of a drug development hype wave and money poured into new stock listings and into exchange traded funds. And the government recently reclassified cannabis as a less dangerous drug. That should have helped cannabis as an asset class. But treatments have been few and stock losses have generally been profound. Holder of a cannabis ETF with the ticker weed were recently down 74% over a decade. Another fund ticker MJ had lost 87%. So I think investors should consider the past performance for pot before piling into psychedelics. There was also a 2003 study on psychedelic medical research. It found many problems, including small sample sizes, selection bias, placebo effects and lack of control groups. This kind of research is hard. Has Anyone heard of Mrs. Winslow's soothing syrup for teething infants? Or Godfrey's Cordial for women with NURBS? These are 19th century patent medicines and they were quite effective for pain relief and calming. But their active ingredients, morphine and opium, brought other problems. We're a long way from those incautious days. But that doesn't mean that future psychedelic cash flows will support today's stock highs. Let's take a quick break. We'll come back with Jonathan and earnings season.
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Data is everywhere. But is it ready for consumption? Morningstar developed the language of global investment data so you have the right ingredients to help you shine. Morningstar, where data speaks.
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Welcome back. I've talked in the past about the sultry tango that we usually see around this time of year between companies and Wall street analysts. That's where earnings estimates start out high. And then analysts gradually bring them down to levels where companies can then leap over them with a rose in their mouths and somebody shouts, olay. I think that's how it goes. And investors are generally cheered. Well, that's not quite what we're seeing now. We're seeing expectations that started off high and stayed high and companies coming in with numbers that are even higher. Earnings growth for the Overall S&P 500 looks quite spectacular, to tell you the truth. And that, I suppose, is good news for investors who are hoping that corporate results will justify the gains they've seen in their stock portfolios. I wanted to learn more about how sustainable this trend is and what else is going on with earnings. I reached out to Jonathan Gollop. He's the chief Equity strategist at C Seaport Research Partners. Let's hear part of that conversation now. Hi, Jonathan. Nice to see you again.
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Good to see you, Jack.
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I want to start with earning season. How would you characterize the earnings performance so far of US Companies? I'll give you three choices. A, wonderful. B, rapturous. Or C, otherworldly. What do you, what do you think so far?
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I mean, it's pretty otherworldly. I mean, you have, we're beating BY Something like 9% on the earnings that are, that are coming in and the overall growth rate is, is, is really super. And what's interesting, if you compare this Quarter to what's expected for the year is the, really the upside on the energy stocks doesn't really happen in the first quarter, really happens in the second quarter and that gives a bigger lift to the rest of the year. So just however, however you look at it, this is a, is this, this season is a really big deal.
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I think I know what's behind this. I mean I think it's, you know, it's not, it's not home builders, it's not canned soup. But tell me your impression of, you know, what's, what, what's driving this.
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Well, it's, it's, it's actually quite lopsided. Right. I mean if you start with the stuff that you and I think about as the stock market historically our cyclical sectors, industrials and consumer stocks and things like that, and they're delivering low single digit growth rates. If you look at the defensive sectors, the healthcares and the REITs and utilities and staples, it's low single digit growth rates. Financials are delivering a terrific earnings season. And we can talk about what's going on in financials uniquely because it probably doesn't continue into the, into the upcoming quarter. And then you have technology, but in particular semiconductors that are off the chart. Actually if you take the semis out of tech, it's really good, but it's not as obscene.
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I want to come to tech, but I don't want to forget to ask about banks or financials. What's happening there. That is, it sounds intriguing, something going on that, that is, that will not continue well.
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So first of all, the best environment for banks, number one, is that volatility spikes and trading activity becomes really strong. And when that happens, the problem, Jack, is that you also tend to see defaults start to pick up. Banks don't want to lend money when there's a lot of volatility and bad things might be happening. But you're actually finding that we're not having that yet. Loans are being paid, the corporate and consumer health is, is, is really quite strong. So you haven't seen the downside to let's say the what's going on in, in Iran and the like. But you are seeing the upside which is, is a lot of trading activity. Now that's, so that's, that's the good news. Here's the slightly less good news. If you look at when during the quarter this, this spike in trading happened, it was really in the month of February and then it rolled over. So if you talk to people covering financials there or you know, traders, they're basically saying is, is that things have kind of dried up a bit. There was a lot of activity leading into the war. And then once the, once the war started, people had kind of repositioned their portfolios and volumes have not been as good. So it doesn't look like the, the jump in trading activity in the first quarter is necessarily going to continue in, you know, in, let's say, the second quarter.
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I have a wonderful question for you. Now I'm taking it from the title of a report from a very smart fellow on Wall street called Jonathan Golub at Seaport Research Partners, which is of course you. And the title is, is 18% EPS earnings per share growth in 2026 even possible? I guess that comes from the latest consensus forecast for the s and P500 earnings. What do you think? Does it look possible? And let's take that further. Does it look, I mean, I guess we wouldn't call it sustainable. I mean, do we expect earnings growth in future years to be decent for similar reasons?
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First of all, I wrote it in a way to almost tease the reader and this note that we sent out to, I don't know, 10,000 clients or something, but the note was written almost to say, look, of course not. I mean 18% EPS growth. The only time, Jack, that we have growth in earnings that look like that is when you're leaving a recession and you had a really bad number and you jumped off of this low point and economic activity kind of catches up and surges. And other than that you never have numbers that look like this for the broad market. But there's a couple of sub stories here and if I look at the year, so the first thing is the semiconductors are expected to grow 74% and the, the important thing is, is that they're almost 15% of the S&P 500 market cap. So if you think about that, that that's like half of the whole story is just semiconductors.
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And there was a point where, where someone might have said, well that's just Nvidia. But it's not just Nvidia anymore, it's a hard drive companies, it's even. And the CPU makers are coming around and suddenly CPUs are very in demand for AI. So all sorts of chip companies seem to be benefiting.
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Yeah, it's not everything. So the analog chip makers are doing well, but they're not doing obscenely well. And by the way, so for people who are listening, an analog chipmaker is if you drive your car and, and There's a chip that checks like the air pressure and gives you that, you know, that, that sense that you're a warning that, that your tires are low, that that's, that's a chip. But it's not the same kind of chip that, that Nvidia would use to, you know, do AI stuff.
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Something that connects the digital world to the real world, to something actually physically happening in the real world. That's what I think of as analog chips. So they're not, they don't have the same type of updraft here.
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But the, the thing which is interesting, a lot of these semiconductor companies are actually guiding to much stronger earnings than Wall street analysts are even predicting. So it's strange that, why, why would the companies be more optimistic than the analysts? If you look at the estimates, they've just, they just keep going higher and higher and higher. Normally what happens is Wall street analysts are an exuberant bunch. They put out these big numbers and by the time that they, from their initial estimates at time that reality sets in, the numbers are 5 or 6 or 8% lower. And it is, and listen, this is not a, this is a, it's not a particularly well kept secret. So, so we know that this pattern, we know this pattern happens.
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One note that I saw on a, I believe a hard drive stock, it said the number that was our ceiling is now our floor. And by the way, this is the third consecutive quarter that that's happened. So they just keep going up and up and up and they're, and the rest, they're, they're catching up as you, as you point out to what these companies are delivering.
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But I think a lot of this is a little bit of disbelief on the part of the market which, which means that the upside to the S and P, from a price perspective, the upside to earnings estimates are being legitimately underestimated. If you look at the rest of tech, one area that we're actually seeing weakness in particular in the first quarter more than the full year is the hyperscalers are spending a lot on CapEx. And in the first quarter, many of those names, it looks like their earnings growth, not their earnings earnings will be 5, but the earnings growth is going to be closer to flat on some of these names because of the Capex dollars. Now the other parts of the earnings story is oil stocks are, they're jumping. Now normally what you and I would think is that if you have a war and the price of oil goes up because there's potentially a supply shock, that's great for Oil companies, but it's going to hurt the people who use oil. So it's going to hurt the American consumer or industrial companies. And that is not happening. Since the beginning of the war, the earnings estimates for the whole market have gone up by three and a half percent. I mean that's, you know, so they were like, you know, they were like 14 and a half, they went to 18 and they, the majority of the recent change is in the energy sector. And then I had mentioned earlier that materials companies, not chemicals companies and metals and mining companies are benefiting from higher gold prices of precious metals. So there's, it, it's really, it's, it's shocking that the numbers are this big. And I think that the risk is actually that they're underestimated.
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So when we talk about these things like the earnings growth and whether it can continue and so forth, we're getting to a question that's on everyone's mind right now, which is they say, I love what I'm seeing in my, let's say 401k statement. Am I okay? Is it too much, too fast? Can it keep going? What do you think? We'll see.
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I think that investors and the public are mischaracterizing it. The market is up less than the earnings are. The earnings are so strong that you've actually had the valuations come down and the market is trading much lower than it was at the beginning of the year or middle of last year, making it much healthier. I'd say software and semi stand out more than anything else. But the semiconductor names, those that are exposed to the AI theme, they're looking at something like in the next couple of years could be something close to 100% growth between 26 and 27. And they're trading at a stock market multiple equal to the s and P500. And so that's really amazing. And then the software companies are getting beaten up largely because people have this concern that AI is going to disrupt it and what's the long term future for these companies? And the market has not been very discriminating between who are the winners and losers. The market says, I don't know, let's just take the group down. This idea that pricing going up means things are more expensive, which would happen if you went, bought a shirt. But it doesn't happen necessarily when you're buying a stock.
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Been too long since I bought a shirt. I have to think how that works again. But this is good news. The stock market is getting, as you put it, cheaper relative to Earnings that should make people feel better. Just tell me about that earnings growth. When we talk about all this money being spent on AI, some of it's being used to build infrastructure. Is there what happens over the next couple of years? I mean, does that. They can't keep spending like this forever, can they? What do you think happens from here for the trajectory of earnings growth?
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If you look at the build out of infrastructure around, you know, putting this cable under the ground to, to wire the world that we now have, which is, you know, has Internet and, and, and all these, these things, the guys who were making huge investments in these, in this build out back in the, in the late 90s and the early Os to wire the whole world up, they were right. They got the call. Right. But, but a lot of them lost, you know, their, their companies went to zero or they lost a lot of money because it took a, a period of time for us to absorb that. The interesting thing though is if you put a cable under the ground and you come back a year later, the chances are the cable's still under the ground. These, these chips, they, they, there's innovation. So a chip that you buy today, one of the questions is do you need to replace that chip in two or three years from now? So that in reality there's, there's a bit, there may be a bit more, more churn. But if you think about the, the data centers and the hyperscalers, who are the users of these, of this infrastructure, they're not having the same level of explosive growth. They're really investing for the long term. And the competitiveness of the companies, as much as I think they're going to hit these numbers and maybe beat them, the expectations the next year will look more like 10%, not, not 18. And by the way, 10% will be a home run. But no, we don't stay here. That, that's, you know, trees don't grow to the sky. This is not going to continue. That's interesting to me.
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All right, Jonathan. I feel pretty good about things and I always appreciate speaking with you. I learned some things. Thanks for taking the time.
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All right, Jack. Thank you.
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Thank you, Jonathan, and thank all of you for listening. If you have a question you'd like played and answered on the podcast, you could send it in. It could be on a future episode. Just use the voice memo app on your phone. Send it to Jack. How that's h o u g h@barron's.com, you can subscribe to the podcast and Apple podcast, Spotify. Wherever you listen, you can leave a review on Apple or Spotify. I've heard it gives people a warm feeling of profound fulfillment. Sounds pretty good. See you next week.
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Data is everywhere. But is it ready for consumption? Morningstar developed the language of global investment data so you have the right ingredients to help you shine. Morningstar, where data speaks.