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Ahead of Wall Street

Monday, January 20, 2014

Markets are closed today for the Martin Luther King Day, but the focus the rest of this week will be on corporate earnings as the 2013 Q4 reporting cycle ramps up. A total of 69 S&P 500 members are on deck to release results this week, including such leaders as IBM (IBM - Analyst Report), Starbucks (SBUX - Analyst Report), McDonald’s (MCD - Analyst Report) and Microsoft (MSFT - Analyst Report). By the end of this week, we will have seen Q4 results from almost a quarter of the S&P 500 members and will be in a fairly good position to judge this earnings season.

The results thus far from the 52 S&P 500 members show companies struggling to beat lowered earnings and revenue expectations. But this is early going in the cycle as we don’t have representative enough samples from most sectors. Finance is the only sector where we have a representative sample of results, with Q4 results from almost half of the sector’s total market capitalization already out. Total earnings for the sector are up +14.2% from the same period last year, with strong year-over-year gains at Bank of America (BAC - Analyst Report) driving most of the gain. Excluding the $2.7 billion positive year-over-year swing in BAC’s total earnings, growth for the sector would be down +3%.

But even including Bank of America’s hefty contribution, the Finance sector’s growth rates and beat ratios don’t compare favorably to what we have seen from this same group of companies in recent quarters. The picture may improve a bit in the coming days as the insurance industry, the second largest in the Finance sector after the big banks, start releasing results (profitability of the insurance industry was held down in the year-earlier period by Sandy-related expenses). Effective cost controls, reserve releases and favorable trends in the mortgage business helped banks offset tepid loan growth and net interest margin pressures in recent quarters to produce earnings growth. But the effect of these forces is diminishing already and need to be replaced by improvement in core earnings power.

As we start seeing results from companies beyond the Finance sector, management guidance will take the spotlight. Guidance has been overwhelmingly negative in recent quarters, but the improvement in the economic backdrop has raised hopes of a turnaround on that front. We haven’t seen any evidence of such a turnaround yet and the soft reports from Intel (INTC - Analyst Report), CSX Corp (CSX - Analyst Report) and UPS (UPS - Analyst Report) may be reflective of company-specific issues and not relevant to the broader corporate world.

The market tolerated the persistent negative estimate revisions trend last year in hopes of a favorable shift down the road. But it can’t be expected to remain so accommodative forever, particularly in a post-Taper world.

Sheraz Mian
Director of Research

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