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Wednesday, October 30, 2013

This morning’s weaker than expected ADP jobs reading is likely indicative that the loss of momentum in the labor market in the second half of the year liked got further weakened as a result of the shutdown. The stock market is interpreting this emerging economic landscape as sufficiently soft to keep the Fed’s foot on the QE paddle. We will find later this afternoon what the Fed has to say about this, but current consensus expectations don't expect any changes to the QE program before April 2014.
 
The Fed isn’t expected to announce any changes this afternoon, but it’s assessment of the economic picture will provide useful clues to the Taper timeline. At the September meeting, they had described the pace of economic growth as ‘moderate’, an upgrade from the ‘modest’ descriptor they had used before. It will be interesting to see how they describe the underlying economy now, particularly with the government shutdown believed to have taken a bite out of Q4 GDP growth as this morning’s ADP shows.

The market’s attention is justifiably on the Fed, but we are also in the midst of the Q3 earnings season. Just like economic data, the earnings season is neither too hot, nor too cold. Earnings aren’t great, but they aren’t terrible either. The overall level of earnings remains quite high, though there isn’t much growth. The market seems to be ok with that, particularly if the Fed continues to remain on the QE beat.
 
Including this morning’s reports from General Motors (
(GM - Analyst Report)), Comcast ((CMCSA - Analyst Report)), and others, we now have Q3 results from 310 S&P 500 members that combined account for account for 68.2% of the index’s total market capitalization. Facebook ((FB - Analyst Report)) will be reporting after the close today. Total earnings for these 310 companies are up +6%, with 67.4% coming ahead of consensus earnings expectations. Total revenues are up +3% and 49.7% are beating top-line expectations.
 
This is better performance, particularly on the earnings side, than what this same group of companies reported in Q2 and the 4-quarer average. The variance of the last few quarters is particularly notable outside of the Finance sector, which has picked up this quarter. The growth pick up in the Technology sector relative to what we have been seeing in recent quarters spotlights the ex-Finance improvement, though the growth pace in other sectors like Transportation, Energy and Basic Materials has also improved.

Despite the negative comparisons at sector leader Apple ((AAPL - Analyst Report)), total earnings for the Technology sector are currently up +5.1% from the same period last year, which compares to earnings decline of -11.9% in Q2 and the 4-quarter average earnings decline of -3.5% for the sector companies that have reported already.
 
The composite earnings and revenue growth rates for Q3, combining the results for the 310 companies that have reported with the 190 still to come, are +3.6% and +2%, respectively. This puts Q3’s earnings growth rate on track to be modestly better than what we saw in the first two quarters of 2013. Expectations for 2013 Q4 have started coming down, but they likely still have plenty of room for coming down, with total earning for the S&P 500 expected to be up +8.5%,  down from +9.1% last week and higher than +10% at the start of the reporting season.

Sheraz Mian

Director of Research

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