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Thursday, October 13, 2013
Some tell-tale signs of thaw in DC are raising hopes that the two sides may have finally started moving towards a resolution. Hard to tell if it will result in ending the shutdown and the debt ceiling issue, but the markets find these developments reassuring enough to start today’s session on a positive note.
This morning’s Jobless Claims data likely wouldn’t have much sway as it’s hard to see how the claims numbers would look without the extraneous influences. Let’s hopes that subsequent headlines out of DC don’t wash away the emerging air of optimism.
Positive movement on the DC issue will help the market start paying attention to the 2013 Q3 earnings season which has gotten underway already. Micron Technology ((MU - Snapshot Report)) and Safeway ((SWY - Analyst Report)) will report results after the close today, but we have seen Q3 results from 27 S&P 500 members already. Total earnings for these 27 companies are up +8.3% with 51.9% of the companies beating earnings expectations. Total revenues for these companies are up +4.6% with 44.4% beating top-line expectations.
This is very early in the reporting cycle, but the earnings and growth rates for these companies are tracking better than what we saw from these same companies in Q2 and the 4-quarter average, while the beat ratios are a bit lower. We will have a much better sense of the Q3 earnings season by the end of next week, as by then we will have seen results more than 1/5th of the S&P total membership.
J.P. Morgan ((JPM - Analyst Report)) will kick-start the Finance sector’s results with its Q3 report tomorrow; Wells Fargo ((WFC - Analyst Report)) will also be reporting Friday morning. The consensus expectation is that JPM’s Q3 total earnings will be -15% lower from the same period last year. The operating environment for the banking sector was less than helpful in Q3, with the wind-down of the mortgage refinancing boom as a result of higher interest rates and continued weak demand for loans from households and businesses not getting offset by enough strength in capital markets activity.
As a result, total earnings growth for the Finance sector is expected to be up only +3.9%, with flat growth at the major banks and positive momentum at the brokers offset by tough comparisons for insurers and the regional banks.
A key question about the Q3 earnings season is how companies guide towards Q4, as expectations for that quarter still reflect a strong growth ramp-up. The predominant tone of guidance thus far from the 27 companies that have reported results already remains on the weak side, but we will know much more next week as a big cross section of the corporate world will be coming out with results. My sense is that guidance wouldn’t be any better than what we have been seeing over the last few quarters, prompting estimates for Q4 to come down sharply.
Director of Research