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Ahead of Wall Street

Tuesday, October 15, 2013

The stock market is hoping for the Senate negotiations to result in a deal and all indications are that a deal will get announced sometime today. This will be no more than a kick-the-cane-down-the-road type of solution, but it will nevertheless help move past this issue and start focusing on things that really matter to the market, like the Q3 earnings season which moves into high gear starting today.

The picture emerging from the first big day of the Q3 reporting cycle today is a mixed one, with weak-looking results from Coca Cola (
(KO - Analyst Report)) and Citigroup ((C - Analyst Report) ) and a handy beat from Johnson & Johnson ((JNJ - Analyst Report)). Other major reports on deck today include Intel ((INTC - Analyst Report)) and Yahoo ((YHOO - Analyst Report)) that will report after the close. Including this morning’s reports, we now have Q3 results from 35 S&P 500 members.

Total earnings for these 35 companies are up +7.9%, with 51.4% coming ahead of consensus earnings expectations. Total revenues are up +2.5% and 40% are beating top-line expectations. The results thus far are weaker than what we have seen for this same group of companies in recent quarters. The +7.9% earnings growth in Q3 for these companies compares to +17.7% in Q2 and the 4-quarter average of +15.6%, while the +2.5% revenue growth is below Q2’s +6.3% and the 4-quarter’s average of +5.4%. The beat ratios are similarly tracking lower.

As we have been saying here repeatedly, the key aspect of this earnings season is not so much the growth rates and beat ratios for Q3, but rather the evolving expectations for Q4. Consensus expectations have been looking for a rebound in earnings growth in Q4, which then continues into the following quarters. The persistent pattern for more than a year has been for companies to guide lower for the current quarter as they report last quarter’s results, prompting analysts to cut estimates.

It is still early in the Q3 reporting cycle, but we have started seeing Q4 earnings estimates come down a bit in recent days. Investors didn’t care much in the earlier episodes of negative revisions and many are hoping for a repeat performance this time around as well. But that’s not a given and the coming days of estimate cuts could become a more serious headwind for the market than the Washington worries.

Sheraz Mian
Director of Research

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