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Ahead of Wall Street

Friday, October 18, 2013

Positive GDP growth data out of China and another day of mixed Q3 earnings reports provide the backdrop for today’s trading action. The China data may not be enough to answer all questions about that country’s growth outlook, but today’s data is nevertheless reassuring. The picture emerging out of the earnings season is on the weak side, with no growth outside of the Finance sector and most companies missing revenue expectations.

China’s Q3 GDP growth matched expectations by coming in at +7.8%, up from +7.5% in Q2 and +7.7% in Q1. These growth numbers should go some way towards easing concerns about the country’s growth outlook. Data about industrial production and retail sales for September released today also matched expectations and broadly point towards growth stabilization.

Other recent data, particularly export growth in September, has been indicating some loss of momentum late in Q3, raising questions that the GDP growth pace may not be sustainable in the final quarter of the year. The Q3 earnings season hasn’t provided much reassurance on the China question either, with the IBM (IBM - Analyst Report) and Yum Brands (YUM - Analyst Report) reports particularly raising doubts about that country.

Including this morning’s reports from Morgan Stanley (MS - Analyst Report), General Electric (GE - Analyst Report), Schlumberger (SLB - Analyst Report), Baker Hughes (BHI - Analyst Report) and others, we now have Q3 results from almost one-fifth of the S&P 500 members. Total earnings for these companies are up +1.1% year over and 64% of the companies are beating earnings expectations.

Total revenues are up +1.7%, with only 37.2% of companies beating top-line expectations and median revenue surprising by +0.1%. This is weak performance than we have seen from this same group of companies in Q2. Total earnings growth for these companies is in the negative, outside of the Finance sector.

The evolving expectations for Q4 are a point of key interest in the earnings picture at this stage. Consensus expectations are for strong growth rebound in Q4, which is then expected to continue into the following quarters.

The recurring pattern over the past year or so has been for companies to guide lower, prompting analysts to cut estimates. We have started seeing Q4 earnings estimates come down a bit in recent days, but the pace of revisions is expected to accelerate in the coming days as more companies provide Q4 guidance.

Sheraz Mian???
Director of Research

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