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Ahead of Wall Street

Tuesday, February 18, 2014

Stocks have moved back close to the record level where we started 2014 as some of the worries that weighed on the market over the last few weeks have started to ease. Today’s session will likely reflect further follow through on this theme.

Investors appear willing to look past the recent run of soft U.S. economic data, with weather generally getting all the blame and growth expected to resume in the second half of the year. Investors appear to be applying a similar logic to the earnings picture as the Q4 reporting season winds down, with near-term growth challenges expected to eventually ease up along with the economy.

The weather explanation for the recent run of soft economic data certainly makes sense – it has been one hell of a winter this year. The expectation is that data will improve as the economy’s deep freeze thaws with the arrival of Spring. What this means is that February’s data arriving in March will be no better and we will need to wait at least through April (for March data) to start seeing some light. As such, investors have given up on GDP growth in the first quarter, with the economy’s growth momentum expected to resume in the second of the year. All of this sounds plausible enough, though last week’s negative revision to December and November Retail Sales numbers runs counter to this weather-centric narrative and is likely reflective of less consumer spending momentum in Q4 than earlier believed.

On the earnings front, including this morning’s reports Coca Cola (KO - Analyst Report) and others, we now have Q4 results from 404 S&P 500 members. Total earnings for these companies are up +11.1% from the same period last year, with 68.6% coming ahead of consensus EPS estimates. Total revenues are up only +0.9% and 61.6% have beat revenue expectations. Revenue weakness has been a recurring theme in recent quarters and Q4 is no different, though the unusually low growth pace thus far is mostly due to the Finance and Energy sectors, particularly one-off tough comps for Prudential Financial (PRU - Analyst Report).

The Q4 earnings season has overall been not that bad, with the earnings growth rate the highest of 2013, total earnings on track to reach a new all-time quarterly record, and companies beating estimates at an above-average rate. But they continue to guide lower, prompting estimates for the current quarter to come down. Total earnings for 2014 Q1 are now expected to decline by -2.4%, down from estimates of +2.1% at the start of the Q4 reporting season. With weather an even bigger factor for companies in the retail sector that will be coming out with results in the coming days, we will likely see even more downside pressure on Q1 estimates.  

Sheraz Mian
Director of Research

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