Stocks are on track to open lower in today’s session, with Europe-centric concerns and more follow-through from Wednesday’s Fed statement as the likely catalysts. The jobs report coming out tomorrow has assumed even greater significance following the strong GDP report and the market’s evolving Fed outlook.

Concerns about Europe’s disinflationary pressures were kept alive today, with July CPI for the region coming shy of market expectations – up +0.4% in July vs. consensus estimates of +0.5% and the European Central Bank (ECB) target of +2%. The direct implication of this is that the ECB will need to more be aggressive in its efforts reverse the trend, at a time when other central banks like the U.S. Fed and the Bank of England are contemplating moves in the other direction.

The Fed certainly remains on course to get out of the QE business over the coming months and is increasingly becoming more confident about the U.S. economic outlook. The strong rebound in economic growth in the second quarter as reflected in the better-than-expected Q2 GDP growth rate and steady improvement in the labor market, as shown by this morning’s weekly Jobless Claims and hopes of a strong showing in tomorrow’s July non-farm payroll reading has put the spotlight on the Fed’s eventual interest rate hikes. The Fed didn’t show its hand in its Wednesday statement, but the market justifiably interpreted the Fed’s improved labor market assessment as an indication of a potentially earlier start to the tightening cycle than initially expected.

The improved economic backdrop has been showing up in the ongoing Q2 earnings announcements as well, with management teams broadly describing the global business landscape in better terms than we have been seeing in recent quarters. And that’s likely a main reason why this earnings season is proving to be notably better over the recent past – growth is improving, more companies are beating estimates and there is even some modest improvement on the guidance front.

The updated Q2 scorecard, including this morning’s releases from Exxon (XOM), ConocoPhillips (COP) and others shows that we now have Q2 results from 358 S&P 500 members that combined  account for 78.1% of the index’s total market capitalization. Total earnings for these companies are up +9% from the same period last year on +5% higher revenues, with 67% beating EPS estimates and 59.9% coming out with positive revenue surprises.

The revenue growth and surprises are particularly notable, with the current top-line growth pace and beat ratio the best we have seen for this group of companies in a very long time. This has started to show up in estimates for the current period. Estimates for 2013 Q3 are coming down along the lines of the long-established trend, but the pace of negative revisions is lower relative to any other quarter in more than a year. If we can sustain this trend through the end of this earnings season, this will be a big net positive on the earnings front and potential source of support for the market.

Sheraz Mian
Director of Research