Wednesday, April 16, 2014
Positive looking economic data out of China and the U.S. should help the market sustain the favorable momentum from the last two sessions. Today’s housing starts numbers were a tad light, but they nevertheless reconfirm that we are coming out of the weather-induced slump. The industrial production numbers coming out a little later are expected to show a similar trend.
The Chinese economy grew at a better-than-expected +7.4% rate in Q1, indicating that the pace of deceleration isn’t as bad as many had feared. The recent run of soft economic data, particularly in international trade and industrial production, had raised concerns that Q1 GDP growth could slip below the +7% level in Q1. The March industrial production numbers showed growth of +8.8% for the month, modestly below expectations, but better than the growth pace of the first two months of the year. Growth in fixed asset investments remained below the prior quarter’s pace, likely indicating that the shift towards a more services centric growth model is taking place, though it will be a long drawn-out process.
On the earnings front, Bank of America’s (BAC - Analyst Report) results show more of the ‘one-time’ charges that keep showing up quarter after quarter. I find it hard to justify stripping these charges out of the bank’s results given how recurring they have become in recent years. Beyond earnings, the bank’s mortgage and capital markets business faced the same type of headwinds in the quarter that we saw earlier with J.P. Morgan (JPM - Analyst Report), Wells Fargo (WFC - Analyst Report) and Citigroup (C - Analyst Report) ). Bank of America’s challenge is to bring its cost base in-line with its peer group and while it has made progress on that front, they don’t seem to be there yet.
Including this morning’s reports, we now have Q1 results from 47 S&P 500 members that combined account for 14.5% of the index’s total market capitalization. The scorecard at this stage shows total earnings declining -4.6% % on +0.6% higher revenues, with 63% beating EPS expectations and 43.5% coming ahead of top-line expectations.
The negative growth rate for total earnings at this stage is due to Bank of America, which suffered a more than $2.5 billion swing in earnings. Excluding the Finance sector, total earnings growth improves to +6.1%. But irrespective of whether you include or exclude Bank of America in the aggregate numbers, the result thus far are weaker than what we have seen thus far from the same group of companies.
We saw more negative revisions ahead of the start of the Q1 earnings season than was the case in other recent quarters. This has improved the odds that we will see more frequent positive surprises this quarter than other recent periods. But while beat ratios may be better in Q1, we may not see much improvement on the guidance front, which has persistently been negative for quite some time.
The revisions trend will remain to the down side in the absence of any improvement on the guidance front. It will be interesting to see whether the market will give this earnings season a good grade just with improved beat ratios. We will find out in the coming days.
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Director of Research