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Ahead of Wall Street

Tuesday, November 5, 2013

Soft stock market action across the pond in Europe, following a downgrade of the region’s growth outlook by the European Commission, will likely weigh on U.S. market sentiment at the open. But investors will take their cue from the service sector ISM reading coming out a little later. Investors will be trying to find through the ISM reading the answer to the only question that’s on everyone’s mind, the timing of the Fed’s Taper announcement.

The key economic reports this week include the Q3 GDP report on Thursday and Friday’s government jobs report, but today’s non-manufacturing ISM report will give us a good sense of the economy’s underlying momentum, particularly following last week’s surprisingly strong factory sector ISM report. 

The stronger service-sector showing today – the consensus expectation is for the index to come in modestly below the prior-month’s level – will feed into the December Taper narrative that has slowly been gaining ground lately. With the Q3 earnings season slowly winding down, the timing of the Taper announcement is becoming the sole issue for the market in these final months of the year.

On the earnings front, we got solid results this morning from CVS Caremark (CVS - Analyst Report)) and Michael Kors (KORS - Analyst Report)), while Tesla (TSLA - Analyst Report)) will report after the close today. Including the results from CVS and others this morning, we now have Q3 results from 400 S&P 500 members or 80% of the index’s total membership. 

Total earnings for these 400 companies are up +4.6%, with 67.3% coming ahead of consensus earnings expectations. Total revenues are up +2.9% and 50.1% are beating top-line expectations. The composite earnings growth rate for Q3, combining the results for the 400 companies that have reported with the 100 still to come, is +4.4%, up from +3.6% in Q2.

The Q3 earnings season has turned out to be better not only relative to lowered pre-season expectations, but also relative to the first two quarters of the year. Growth remains anemic, however, and most companies are still guiding lower, prompting estimates for Q4 to come down. 

But we remain on track to achieve a new quarterly record for total earnings in Q3, and the quarter’s earnings growth rate will likely be the best thus far this year. Investors seem to satisfied with this performance, holding out hopes for better growth in the coming quarters.

Sheraz Mian
Director of Research

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