Thursday, January 23, 2014
The mixed PMI surveys out of Europe and China notwithstanding, the spotlight firmly remains on the Q4 earnings season. The key take-away from the European and Chinese PMIs is that the outlook for Europe is steadily improving, while China seems to be losing momentum.
The Euro-zone PMI surveys were broadly positive, with the manufacturing survey coming in better than expected at 53.9 vs. 52.7 in December. France’s PMI reading still remains in contractionary territory, though it showed improvement as well. The German economy continues to show broad based gains, both on the manufacturing as well as service sides. Unlike Europe, the PMI survey in China slipped below the 50 level, the lowest in 6 months. Part of the Chinese weakness could be ascribed to reduced factory output ahead of the pre-Lunar Year slowdown, but it’s consistent with the tepid GDP growth momentum that emerged December quarter figures earlier this week.
The trend shaping place in the global economy for some time now is that the developed economies of Europe, US and Japan now promise better times ahead relative to emerging markets like China and others. The hope for the emerging markets is that they can ride the momentum in the developed world to get their economies out of the current downbeat phase. We have started hearing about this global growth divergence in the earnings calls as well. We saw the other day about IBM’s atrocious sales numbers out of China.
Including this morning’s reports from McDonald’s (MCD - Analyst Report), Union Pacific (UNP - Analyst Report), AmerisourceBergen (ABC - Analyst Report) and others and Netflix (NFLX - Analyst Report) and eBay (EBAY - Analyst Report) after the close on Wednesday, we now have Q4 results from 102 S&P 500 members that combined account for account for 27.3% of the index’s total market capitalization. Total earnings for these companies are up +22.8%, with 65.7% coming ahead of consensus earnings expectations. Total revenues are up +3.6% and 54.9% are beating top-line expectations. The composite growth rate for Q4, where we combine the results for the 102 companies that have reported with the 398 still to come, is for +7.6% growth on +1.7% revenue gains.
The results thus far are not materially different from what we have been seeing in recent quarters. Revenue and earnings growth rates for these 102 companies are roughly in-line with what we saw from this same group of companies in recent quarters and the quality of guidance isn’t much different either. The beat ratios stood out for their weakness relative to recent quarters earlier on, but even they have started improving a bit over the last couple of days.
So, why is everybody so hung up on calling this a weak or mediocre earnings season? Seems like the market was looking something better, particularly on the guidance front. The hope was, and still is, that given the improving domestic economic scene and signs of stabilization in Europe, we will get relatively reassuring guidance from management teams. But we are not seeing that, with managements continuing to provide sub-par outlook for the coming quarter(s). In other words, management teams are dishing out what they have been doing for more than a year now.
What this means for the market is that we will continue to see the same negative estimate revisions trend play out in the coming weeks and months that we have been seeing since mid 2012. The market wasn’t overly concerned about that trend back then, but seems to be a bit cautious this time around. With the Fed getting out of the QE business, the market seems to be looking for a reassuring enough earnings backdrop to sustain the rally. But they aren’t getting reassured, at least not.
Director of Research