Back to top

Ahead of Wall Street

Tuesday, February 11, 2014

Janet Yellen’s first visit to the Capital Hill as the Fed Chairwoman is the today’s most notable event, with investors hanging on to every word that comes out of her mouth. Some may even be hoping that she will indicate willingness to go flow on the Taper question in the face of softening data.

I don't think these Fed hopes are justified. The Fed has decided to get out of the QE business and likely has a very high bar for making changes to its Taper program. They would want to steer clear of doing or saying anything that could be interpreted as indicating their concern about the economic outlook. I strongly feel that Janet Yellen's testimony today will repeat all the usual comments that we have heard in the past from Ben Bernanke. Importantly, the bond market remains well behaved, thanks to the safe-haven flows due to the emerging market issue.

The FOMC didn’t comment on the EM issue in their last meeting, but the Chairwoman will likely get questioned on the subject and the country’s vulnerabilities to problems abroad. The Fed Chairwoman is likely to give an academic response explaining the downside risks to the U.S. economy through trade linkages. Overall, the emerging markets mess doesn’t post immediate threats to the U.S. economic outlook given the country’s below-average trade dependence. But if the problem remains unresolved for longer, then it will be a net negative for the U.S. outlook.

While the Yellen testimony is all the rage today, let’s not forget that we are still in the midst of the Q4 earnings season. Including this morning’s reports from CVS Caremark (CVS - Analyst Report), Mosaic (MOS - Analyst Report) and others, we now have Q4 results from 359 S&P 500 members that combined account for 80.4% of the index’s total market capitalization.

Total earnings for these companies are up +11.2% from the same period last year, with 69.6% coming ahead of consensus EPS estimates. Total revenues are barely positive, up only +0.6%, and 61.8% have beat revenue expectations. Lack of revenue growth stands out and is weaker than what we have seen from this same group of companies in recent quarters, with the Finance and Energy sectors as the primary drags on top-line growth.

Comparing the results from this same group of companies to the last few quarters, performance is tracking better in terms of earnings growth and earnings & revenue beat ratios. Revenue growth is notably weak this time around, but most of that is due to the Finance and Energy sectors, particularly a one-off tough comparison for Prudential Financial (PRU - Analyst Report). Outside of these sectors, the revenue growth picture is not materially different from what we have been accustomed to in recent quarters.

Overall, it has been an ‘ok’ earnings season, no better or worse than other recent quarterly reporting cycles. Companies have beat earnings and revenue estimates at an above-average rate, but they continue to guide lower, prompting estimates for the current quarter to come down. This has been an ongoing trend for more than a year now, but investors have generally been not terribly concerned about this issue as the super accommodative Fed policy convinced them to look for better times ahead.

But with the Fed now getting out of the QE business and new questions about the global and U.S. growth pictures taking the spotlight, investors may not be as accommodative as they have been in the past.

Sheraz Mian
Director of Research

Please login to Zacks.com or register to post a comment.

New to Zacks?

Start Here

Zacks Investment Research

Close

Are you a new Zacks Member or a visitor to Zacks.com?

Top Zacks Features

My Portfolio Tracker

Is it Time to Sell?

One of the most important steps you can take today is to set up your portfolio tracker on Zacks.com. Once you do, you'll be notified of major events affecting your stocks and/or funds with daily email alerts.

More Zacks Resources

Zacks Rank Home - Evaluate your stocks and use the Zacks Rank to eliminate the losers and keep the winners.

Mutual Fund Rank Home - Evaluate your funds with the Mutual Fund Rank for both your personal and retirement funds.

Stock/Mutual Fund Screening - Find better stocks and mutual funds. The ones most likely to beat the market and provide a positive return.

My Portfolio - Track your Portfolio and find out where your stocks/mutual funds stack up with the Zacks Rank.

Zacks #1 Rank Top Movers for Zacks #1 Rank Top Movers

Company Symbol Price %Chg
RPC INC RES 24.91 +8.35%
LITHIA MOTO… LAD 94.59 +4.60%
DELTA AIR L… DAL 39.15 +3.90%
FLAMEL TECH… FLML 14.51 +3.50%
SOUTHWEST A… LUV 28.87 +2.92%