Jobless Claims, Draghi Boost Sentiment

Favorable headlines out of Europe this morning indicating the European Central Bank’s readiness to do everything possible to stabilize the situation has lifted market sprits. We also have positive economic data on the home front in the weekly Jobless Claims and monthly Durable Goods readings.

Importantly, we are in the thick of the second quarter earnings season and the overall tone of this reporting season continues to be on the reassuring side.

The market may be reading too much into the ECB president’s statement, but the expectation seems to be that the Central Bank will implement either another LTRO program or something along the lines of the U.S. Fed’s QE program.

It is hard to envision anything other than a strong ECB action having the potency to reverse the recent negative trend in Spanish and Italian government bond yields. What the market’s reaction to the ECB president’s statement tells us is that developments in Europe, or lack thereof, continue to have an outsized impact on the markets.

On the home front, we got a solid Initial Jobless Claims report that fully reversed the sharp rise the week before. The Jobless Claims data has been unusually volatile the last two weeks, with many citing the seasonal retooling of the auto industry as a key contributor to the recent wild swings. Today’s 35K drop to 353K is heartening as it brings the initial claims level back to the much more desirable 350K vicinity.

The June Durable Goods report is relatively on the ‘mixed’ side, with ‘headline’ gains coming better than expected, while the report’s internals showing pockets of weakness. Overall, the Durable Goods report shows that the factory sector, which has been a strong point of the U.S. economy since the onset of recovery in mid-2009, remains in decent shape.

The ‘headline’ Durable Goods Orders number came in better than expected, and the prior month’s headline reading was revised upwards. This is the second positive ‘headline’ number after three months of negative numbers. Excluding the volatile transportation segment, which tends to jump around on a month-to-month basis due to the ‘lumpy’ nature of aircraft orders, durable goods orders came in lower than expected.

Importantly, while the ‘core’ reading, officially called non-defense capital goods orders ex-aircraft, came in lower than expected, the ‘shipments’ data came in better than expected, likely indicating some upside potential to Friday’s second quarter GDP report.

The current ‘scorecard’ for the second quarter reporting season shows a picture of corporate profitability that is by no means bad. As of this morning, total earnings for the 234 companies in the S&P 500 that have already reported results are up 8.7% from the same period last year, with 65.4% of the companies coming out with positive earnings surprises and a median earnings surprise of 2.5%.

These same companies had total earnings growth of 10.3% in the first quarter, with 73.1% beating earnings expectations and a median earnings surprise of 4.3%.

The relatively unfavorable comparison to the preceding quarter aside, the distribution of growth is quite lopsided this time around as well, with Finance as the primary driver. Total earnings growth is flat outside of Finance (up only 0.3%), while these same companies (ex-Finance) had earnings growth of 8.6% in the first quarter.

Energy has been a drag on earnings growth, as the results from Exxon (XOM - Analyst Report) and Conoco (COP - Analyst Report) highlight; total earnings for the 33% of Energy companies that have reported results are down 19.1% from the same period last year.

Another feature of this reporting season has been the problem many companies are facing in achieving top-line gains, with even superstars like Apple (AAPL - Analyst Report) struggling on that count. Total revenue for the 234 S&P 500 companies that have reported results are down 0.9% from the same period last year, with only 36.3% of the companies beating revenue expectations, with a median revenue surprise of negative 0.5%.

This is significantly weaker than what we saw from these companies in the first quarter, but not surprising given all the growth worries about the global economy.

That said, the overall results have turned out to be better relative to pre-season expectations. And that’s what matters as for as the market is concerned.