A Picture Is Worth $100 Billion

An earnings season update... Mr. Market is 162% more excited than usual... A different story if you take out energy stocks... Another potential sign of 'peak inflation'... The leaders of the obesity fight... A picture is worth $100 billion...

At first blush, this earnings season has not gone as we might've expected...

As you might remember, a month ago we said a possible "disappointing" earnings season could be the catalyst for another leg down in U.S. stocks. But that hasn't been the case...

In one way, this earnings season hasn't played out precisely as we thought. But in another, it has unfolded closer to the expectation than it might appear at first glance...

First, through the end of last week, 87% of the companies in the S&P 500 reported earnings for the second quarter. Three-quarters of them beat Wall Street analysts' estimates – not exactly what we were expecting...

This is part of the reason the U.S. benchmark index is up 16% since mid-June. As our colleague and Stansberry Research partner Dr. David "Doc" Eifrig wrote last week in an update to Income Intelligence subscribers...

To be completely transparent, we were probably more pessimistic than the macro view – and we didn't expect stocks to rally so high.

I (Corey McLaughlin) was also anticipating gleaning new insight on the economy in general from second-quarter earnings reports. But we didn't get much, other than that people are still spending money on in-demand products, even if their prices are significantly higher...

As Doc wrote...

If you're looking for broader insight about the economy derived from earnings, it has all been pretty much what you'd expect. The economy is slowing (though only just a bit), and inflation is eating into company profits... Neither is a big surprise.

This much-hyped earnings season has turned into a pretty quiet affair.

All in all, it has been ho-hum with a stock market rally to boot...

But we can't help but look at some details...

And they tell a few interesting stories...

First, what we're really referring to with our expectation for a potentially down earnings season is that more companies would lower guidance for the rest of the year. It made sense, given a slowing economy and high inflation... and since they now had another quarter of data to assess things.

As we wrote in the July 11 Digest, citing the Wall Street experience of our colleague and Stansberry NewsWire editor C. Scott Garliss...

Typically, companies don't like to cut full-year outlooks until at least the second quarter (in the spirit of keeping things positive). That means if things are heading south, we might see more negative commentary from CEOs and company executives this earnings season than we did coming out of the first quarter.

Indeed, some companies have actually lowered forward guidance (meaning less profits or projecting a gloomy future) and have seen their share prices tank after doing so...

On Monday, chipmaker Nvidia (NVDA) pre-announced that it would probably make $1.4 billion less in revenue in the second quarter than its original outlook. Shares fell 10%...

Walmart (WMT) did something similar last month and its shares fell 10%. That's the sort of behavior that "makes sense."

But as we know, the market – like us as people – can often act irrationally...

Overall, second-quarter earnings of the S&P 500 companies have beaten analyst projections by 3.4%. That might sound like a lot, but it's well below the five-year average of 8.8%...

In other words, companies aren't beating estimates by as much, on average...

Not only that, but the market has also reacted with unusual exuberance to these earnings' reports...

According to data and software company FactSet, in the past five years, companies that report positive earnings "surprises" have typically seen their shares rise by 0.8% in the two days before their earnings release and the two days after...

(Again, this is on average. And you likely know how we feel about this concept... While we don't like to say, "This time is different," an average represents a collection of past results, not a guarantee about the future – especially if the current context has changed significantly from the past... This is another example.)

This quarter, S&P 500 companies that have beat earnings expectations have seen an average price increase of 2.1% in the two days before and after their reports. That also might not sound like a big difference, but it's 162% above the average...

Mr. Market is 162% more excited than usual...

Take streaming company Netflix (NFLX) as an example... The company beat Wall Street's earnings-per-share expectations by 8%. Its shares popped by 18%...

And on the other end, companies that have missed expectations – like Amazon (AMZN) – have still been rewarded. Its shares rose 18% around the time of its second-quarter report, which showed negative earnings per share, compared to a small jump that was expected.

Less, more, and 'expensive'...

Not only that, but broad market valuations have risen back to extreme levels...

The Shiller price-to-earnings ratio, an inflation-adjusted number covering the previous 10 years of earnings of the S&P 500, is back up to 31 – slightly higher than it was before the stock market crash that began in 1929...

And according to our Stansberry's Investment Advisory team's latest update of our market valuation indicator, stocks are back near "expensive" territory again. (Subscribers can check out that report here, along with updates to other proprietary indicators.)

Said another way, if you are a believer that a company's share price should actually reflect how its business is operating and its real future prospects, something isn't matching up.

Companies are beating expectations by less than an average amount... but shares are rising by more than an average amount... and pushing the overall market back to expensive levels.

But when you make one significant, relevant adjustment to the analysis, you're hit with a different story...

When you take out energy companies...

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%.

Just something to think about, especially as gas prices have been taking a tumble down to somewhat palatable levels lately...

A quick note on another inflation indicator...

This morning, the U.S. Bureau of Labor Statistics published its latest producer price index ("PPI") report for July... And, like yesterday's consumer price index ("CPI") report for the same month, it also showed some signs of "peak inflation"...

July's PPI number – which covers wholesale prices paid by businesses – fell by 0.5% year over year compared with a 1% gain in June and a 0.8% gain in May...

Of course, one data point does not make a trend. But we've now seen a few lately that tell us inflation – at least by official headline measures (because of gas) – might finally stop going higher.

As our colleague Matt McCall wrote in his Daily Insight letter yesterday...

Maybe the recent Federal Reserve moves are actually working...

Importantly though, food prices, rents, and other important costs are still rising... We're not ready to declare our national (and global) inflation nightmare over by any stretch.

Some more about yields...

Yesterday, we talked about how the bond market wasn't buying what the stock market was selling. Stocks shot higher yesterday after a not-so-bad CPI report, but the bond market shrugged...

Today, our Stansberry NewsWire team has an insightful analysis on the relationship between 10-year Treasury yields and tech stocks, and they explain why growth companies have caught a tailwind to higher prices lately...

The tech-heavy Nasdaq Composite Index is now up 20% since its June low... and 10-year yields have fallen from above 3% in the past two months...

This report and all of our NewsWire posts are totally free. Check this one out right here.

Finally, today, we have an exciting report from our colleague Dave Lashmet...

Regular readers know Dave has been tracking the many developments in the fight against the obesity epidemic. He's analyzing the companies that are creating brand-new drugs to help people lose and keep off weight.

You might remember a few months ago, Dave penned an exclusive report after attending a diabetes conference where representatives from drugmaker Eli Lilly (LLY) shared clinical data for a diabetes drug... that could also work for obesity. That drug is still under federal regulatory review.

Close readers also know Dave has shared the potential for another weight-loss drug called Wegovy, made by the company Novo Nordisk (NVO). It has already been approved for weight loss... and this company's shares are up 50% since Dave recommended them back in June 2020.

Today, Dave is back with more insight on this race to fight obesity, stemming from a recent article in the Wall Street Journal about a new class of weight-loss drugs that "can fatten drugmakers' profits."

In short, he says the article misses a key point that he and his colleague Erica Saint Clair recently uncovered...

Subscribers to our Stansberry Venture Technology newsletter will soon learn all the details. But as a special treat for Digest readers and to give you a sampling of what you can expect from Dave's work, we've put together a sneak peek here today.

If you are interested in the obesity epidemic at all, or even interested in losing weight yourself, I think you'll find Dave's information enlightening. Here he is to close us out today...

A massive growth market with just a few leaders...

You likely know about the market for weight-loss methods and treatments...

I (Dave Lashmet) have seen lots of interest in various products and programs. You've likely heard about fake cures (insert the herb of your choice here), calorie-counting programs (like WeightWatchers), and thousands of exercise gyms (and Peloton).

But until now, before the two drugs from Eli Lilly and Novo Nordisk, we've never had safe and highly effective drugs for treating weight loss.

Treating weight loss is a $70 billion U.S. market – that's the direct cost of weight-loss methods. Add the direct medical costs from obesity, and that's another $130 billion, easy.

In short, obesity is a $200 billion annual problem in the U.S. Globally, it's closer to a $500 billion problem. That's the opportunity cost of unsuccessfully treating obesity.

That's why the Wall Street Journal was so keen on these drugs. A pair of safe, highly effective drugs could be worth between $20 billion and $50 billion annually.

Right now, these are worth closer to zero dollars...

But that's the point. While a value investor might see nothing much to invest in today – trivial sales to start with, growing to who knows what and who knows when – I look at the situation quite differently.

As I'm about to show, long-established drugs have been used to treat Type 2 diabetes for a decade.

These diabetes drugs use a target called GLP-1R (the glucagon-like peptide 1 receptor) – and the two new weight-loss drugs use the same receptor to suppress your appetite.

That's why these drugs are triggering such profound weight loss: They don't just alter your blood sugar. They stop you from wanting to overeat – so you don't.

This works because both drugs mimic the natural human small protein GLP-1. In fact, they hit the GLP-1 receptor in an identical way. In other words, this is how you were meant to lose weight.

But here's what the WSJ missed, which subscribers to Stansberry Venture Technology will get to see this month – and which I thought I'd share with you...

Both the Eli Lilly drug and the Novo Nordisk drug require once-weekly injections under your skin. That hurts, and it means fewer people will want these drugs... even though they work.

Fortunately, Novo's drug also comes in pill form. But Novo bought that technology, so none of its rivals can copy it. It's a de facto and de jure and every other way monopoly. (And that's a huge opportunity for at least a dozen years... until its patent runs out.)

Nevertheless, Eli Lilly and rival drugmaker Pfizer (PFE) are trying to develop pills that can hit this same receptor. That's where our research comes in...

A picture is worth $100 billion...

Erica and I just built models – yes, our own models – for how these three drugs hit the key receptor, and what happens to the receptor after they hit. It looks like only one of these is a winner.

Venture Technology subscribers will get the full details, but here is the gist...

This illustration shows the GLP-1R, or what we'll call the Appetite Suppressor Protein ("ASP"), when it's empty. Then it shows the receptor when it's bound with Novo's pill – versus bound with Eli Lilly's pill or Pfizer's pill...

You can see that one key region of the receptor moves up (green arrow) when Novo's pill hits it – whereas the receptor is unchanged when the other pills hit.

In short, that's why Erica and I think only Novo Nordisk's pill will trigger profound weight loss. The others might help your blood sugar, but they won't trigger profound weight loss.

We could be wrong. But that's what the science tells us. We don't think either Eli Lilly's or Pfizer's pill will rival Novo's pill, which is called Rybelsus. Conservatively, we estimate Novo is looking at a potential $100 billion in new profit from the drug...

Bottom line... as we did the scientific modeling of the shared drug target, there's only going to be one winner for investors: Novo Nordisk.

Venture Technology subscribers will get much more on this story later this month...

If you're interested in joining them, we've arranged for a special offer to subscribe today. Venture Technology is one of Stansberry Research's most exclusive products, and this research on little-known companies with huge upside is unmatched...

As another example, Dave also owns the top spot in the Stansberry Research Hall of Fame for recommending chipmaker Nvidia long before it became a household name. He sold a partial position in that pick for a 1,466% gain and closed the full position earlier this year for 777%.

So, here's the good news: Today only, you can pay just $2,500 for one year of Venture Technology (that's 55% off what others have gladly paid) and get all of Dave's latest recommendations, risk-free. His next issue is due out in just a few weeks.

To get started with a subscription today, click here.

We're on the Verge of a Sovereign Debt Crisis

Michael Gayed, portfolio manager at Toroso Investments and publisher of The Lead-Lag Report, tells our editor-at-large Daniela Cambone that the way the dollar has acted against other currencies lately signals a potential debt crisis is coming.

Click here to watch this video right now. And to catch all of our videos and podcasts from the Stansberry Research team, be sure to visit our Stansberry Investor platform anytime.

New 52-week highs (as of 8/10/22): Automatic Data Processing (ADP), Centene (CNC), CTS (CTS), General Mills (GIS), W.W. Grainger (GWW), Cheniere Energy (LNG), ShockWave Medical (SWAV), and Waste Management (WM).

In today's mailbag, feedback on the most recent government jobs report and the ballooning number of credit cards in the U.S., which we wrote about on Monday... and a response to a note in yesterday's mail... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"Many of the U.S. jobs currently listed will never be filled.

"They are for workers with specialized experience. Employers list them in hopes of finding someone who can do a job better. Some employers are probably still looking to replace older employees who retired due to COVID.

"Headhunters love these jobs if the employer has an immediate need... They will not put an ad in the newspaper; they will identify similar employers and try to seduce people already working who are usually not looking for a job.

"It is said 20% of employees do 80% of the work.

"Employers are beginning to recognize this. Some even invite unhappy employees to leave. Few will do this but those who do leave will do it for a better opportunity. They don't need permission from their current employer. Unproductive employees have little to show so will not go out looking for greener pastures.

"It is uncomfortable and awkward to terminate employees who have put down roots so companies making a lot of money will keep dead wood on payroll.

"Times are changing so reducing overhead by cutting staff will be the only way to increase (or maintain) earnings.

"In addition to these terminated employees, some zombie companies will be unable to refinance their debt... There will be more bodies on the street looking for work. The number of hard to fill, specialized jobs will decrease as companies try to economize." – Paid-up subscriber Ed M.

"In the article Corey posted [he says] we now have the highest number of credit cards ever, with 18- to 25-year-olds opening the most of these new accounts. Aren't these also the student loan holders that expect that debt to be canceled? One can only hope they feel a bit more responsible in repaying credit card debt, but I seriously doubt they will." – Paid-up subscriber Mike G.

"Heinrich E. wrote that he does not 'envy any of the folks in senior positions at the Fed.' Does he really think any of them face any consequences for their actions? Now or any time in the entire existence of their cabal? And as for the Fed's tools, they are doing exactly what they were meant to do since they were concocted back around 1913 – systematically siphon the earnings/savings of the American citizens, especially the middle class, and transfer it to themselves through artificial booms and busts, rinsing and repeating again and again.

"The decline of the U.S. dollar is in its final stage and soon will be ushered out the door as Woodrow Wilson's utopia, like all 'utopias,' will 'progress' as they always do. As the song goes, don't weep for them, Argentina." – Paid-up subscriber Gary S.

All the best,

Corey McLaughlin with Dave Lashmet
Baltimore, Maryland and Bainbridge Island, Washington
August 11, 2022