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Tuesday, November 12, 2013

It’s all about the Fed at this stage. Specifically, the market’s assessment of when the Fed will start the QE Taper will determine whether stocks can sustain the momentum into the final weeks of the year. The market’s earlier confidence in April 2014 as the likely time for that decision has wavered a bit following last Friday’s surprisingly strong jobs report.

Recent movements in treasury bonds and foreign exchange markets clearly indicate that investors are unwilling to take the December Taper completely off the table. This all makes sense as the U.S. economy has been showing a lot more resilience than many would expect following the shutdown. The jobs report wasn’t the only piece of encouraging data that we have seen in recent days – the Q3 GDP growth came in better than expected, notwithstanding the report’s relatively shakier internals, and the two ISM surveys pointed towards steady expansion in both manufacturing as well as services.

We will have more data before the Fed’s next meeting. We will get a sense of consumer spending trends in the coming weeks as the holiday shopping season gets underway and we will also get another jobs report early next month. My sense is that if we don’t see any deterioration in economic data by the time of the December Fed meeting, then it makes perfect sense for Bernanke to start unwinding the QE in his last meeting as Chairman. If nothing else, it will cement his legacy and make life a lot easier for Janet Yellen, whose Senate confirmation hearings start this week. Given Yellen’s longstanding insider status, those hearings aren’t expected to produce any surprises though the markets will be closely following them.

On the earnings front, results from homebuilder D.R. Horton (DHI - Analyst Report) came modestly short of expectations on both the top- and bottom-lines. Dish Network (DISH - Analyst Report) handily beat expectations, while News Corp. (NWSA - Analyst Report) missed expectations after the close on Monday. Including these results, we now have Q3 reports from 452 S&P members or 90.4% of the index’s total membership.

Total earnings for these 452 companies are up +4.7%, with 65% coming ahead of consensus earnings expectations. Total revenues are up +3.1% and 42.7% are beating top-line expectations. The composite earnings and revenue growth rates for Q3, combining the results for the 452 companies that have reported with the 48 still to come, are +4.4% and +2.9%, respectively.

This has been an overall positive earnings season, with the earnings and revenue growth rate modestly accelerating from the first half’s growth pace. But most companies have continued to guide lower, prompting estimates for the coming quarters to come down. Investors haven’t cared much in the past in response to this downshift in earnings estimates. But it will be interesting to see if they will continue with that trend going forward, particularly after the Fed starts getting out of the QE business.

Sheraz Mian
Director of Research

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