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Ahead of Wall Street

Thursday, October 31, 2013

The stock market today will reflect further follow-through from the Fed’s Wednesday statement that many perceived to be relatively on the hawkish side. The market may not pay much attention to the weekly Jobless Claims numbers, but it has more Q3 earnings reports to digest, with further follow through to last evening’s Facebook (FB - Analyst Report) results and a busy docket of releases this morning.

There wasn’t anything overtly hawkish about the Fed statement as they effectively maintained their existing policy. But the market appeared to be surprised by the central bank’s positive economic outlook, which was interpreted to mean that Taper could start as early as at the December meeting.

The market had started pricing no Taper at least through April 2014, but the Wednesday statement appeared to run counter to that outlook. This incremental source of uncertainty will likely figure prominently in the market, with economic data tainted by the shutdown and the earnings season slowly winding down.

On the earnings front, Facebook shares will be in the spotlight after the company’s blowout numbers after the close on Wednesday. The stock quickly gave up its initial gains after the CFO announced on the earnings call that U.S. teens were spending less time on the site and that the share of ads in users’ news feeds may have already maxed out. While the company still has a number of untapped opportunities for incremental ad dollars, these disclosures do create fresh doubts in the minds of investors.

Including this morning’s reports from Exxon (XOM - Analyst Report), MasterCard (MA - Analyst Report), ConocoPhillips (COP - Analyst Report) and others, we now have Q3 results from 343 S&P 500 members that combined account for account for 72.2% of the index’s total market capitalization. Total earnings for these 343 companies are up +5.7%, with 67.9% coming ahead of consensus earnings expectations. Total revenues are up +3.3%, and 50.7% are beating top-line expectations.??????

This is better performance than what this same group of companies reported in recent quarters, with the growth pick up outside of the Finance sector accounting for all of the variance. The growth rate has notably picked up for the Technology sector relative to what we have been seeing in recent quarters, though the growth pace in other sectors like Transportation, 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 an earnings decline of -11.6% in Q2 and the 4-quarter average earnings decline of -3.4% for the sector companies that have reported already.

The composite earnings and revenue growth rates for Q3, combining the results for the 343 companies that have reported with the 157 still to come, are +4.1% and +2.2%, respectively. This puts Q3’s earnings growth rate on track to be 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 earnings for the S&P 500 expected to be up +8.4%, 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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