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Wednesday, April 24, 2013

The underwhelming Durable Goods Orders report and a mixed slate of earnings reports provide the backdrop for today’s trading action. Investors have been shrugging all evidence of economic and earnings weakness over the last few days, causing the market to recoup most of the prior week’s losses. Nothing goes up forever, though this market has defied the skeptics, like yours truly, for quite a while.
 
This morning's economic data provides further confirmation that the U.S. economy lost the momentum it displayed in the first two months of the year as it entered March. The Durable Goods report, parts of which serve as a proxy for business capital spending, was expected to weaken after the strong gains in February. But this morning’s reading turned out to be weaker than expected and the February gains were revised down. This report will prompt analysts to revise down their estimates for Friday’s first read on Q1 GDP, which was expected to show gains in excess of +3%.
 
Transportation is a big and fairly volatile component of the monthly Durable Goods report. But unlike the underwhelming Durable Goods report, we got solid Q1 earnings reports this morning from two major transportation equipment makers – Boeing (
(BA - Analyst Report)) and Ford ((F - Analyst Report)), both handily beating expectations. Proctor & Gamble’s ((PG - Analyst Report)) results, particularly its outlook, tuned out to be a lot less impressive, as was the Apple ((AAPL - Analyst Report)) report after the close on Tuesday. The iPhone maker tried to buy off investors with bigger share buybacks and an increased dividend, but the moves may not be enough to satisfy the market’s worries.

Including this morning’s big basket of earnings reports, we now have Q1 results from 173 S&P 500 companies or 48% of the index’s total market capitalization. For the Finance and Technology sectors, the two largest in the index, we now have Q1 results from 57.4% and 70.8% of the sectors’ market capitalization, respectively.
 
Total earnings for these 173 companies are up +2.9% from the same period last year, with 68.8% beating earnings expectations. Revenues are up +3.2%, but only 33.5% of the companies coming ahead of top-line expectations. The +2.9% earnings growth rate is up from +0.2% gain for the same group of companies in 2012 Q4, but is below the 4-quarter average earnings growth rate of +4.2% for the same cohort. The revenue growth rate and earnings ‘beat ratio’ is comparable to what we saw from the same group of companies in Q4 and in the last few quarters. But the stand-out weakness is on the revenue ‘beat ratio’, which at 33.5% is materially below the 64.2% rate for the same group of companies in Q4 and the 4-quarter average ‘beat ratio’ of 52.6%.
 
The composite growth rate for Q1, where we combine the results of the 173 companies that are out with the 327 still to come, is for +0.7% growth in earnings on +0.3% higher revenues. The composite earnings and revenue growth for Q1 has been going up since the earning season got underway; it was in negative territory at the start of the reporting cycle. The median surprise is +3.3% on the earnings side and negative -0.5% on the revenue side thus far.

There is nothing to get excited about these results, though they are admittedly not terrible either. In many respects, the Q1 reports that we seen thus far are not materially different from what we have been seeing repeatedly over the last few quarters – in terms of growth rates, surprises, and even guidance. As such, the final verdict on the Q1 earnings season will likely be of another average-looking quarter.
 
But the issue is with respect to the earnings picture for the coming quarters, particularly the back half of 2013 and next year. The consensus expectation is for a strong rebound in the second half of the year after ‘flattish’ growth in the first half. Hard to envision those growth expectations panning out given the soft economic backdrop, as this morning’s Durable Goods report reconfirms. Investors seem willing to overlook those questions for now. Let’s see how long the party lasts.

Sheraz Mian
Director of Research

 

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