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Washington Spotlight Clouds All Else

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Washington Spotlight Clouds All Else

Developments in Washington DC are in the spotlight, stealing the limelight from a host of top-tier economic data and a steady trickle of 2013 Q3 earnings reports. Reporting season has gotten underway and 17 S&P 500 companies already come out with results, as of Friday September 27, 2013. This week brings earnings reports from 20 companies, including 4 S&P 500 members. Walgreens (WAG), Monsanto (MON), and Constellation Brands (STZ - Free Report) are some of the notable companies reporting results this week.   

We have had a few strong earnings reports already, particularly from Nike (NKE - Free Report) , FedEx (FDX - Free Report) , and AutoZone (AZO - Free Report) , but the overall trend at this admittedly very early stage is mixed. The market isn’t paying much attention to the Q3 earnings season at this stage as all the focus is on handicapping the odds of a government shutdown and, more importantly, the debt ceiling issue. The day of reckoning on the budget/shutdown issue is upon us, though we still likely have a couple of more weeks before the debt ceiling will positively need to be raised. Needless to say that this DC spotlight isn’t market friendly as it heightens the real or perceived risks to the economy.

Low Expectations for Q3

As has been the case at the start of recent quarterly earnings cycles, expectations for the Q3 earnings season have fallen sharply over the last three months. Total earnings for companies in the S&P 500 are now expected to be up only +1.1% from the same period last year, down from +1.2% last week and +5.1% at the start of the quarter in early July, as the chart below shows.

This negative revisions behavior is hardly unusual as we have been repeatedly seeing this pattern play out in recent quarters. Companies have been overwhelmingly guiding lower, prompting analysts to cut estimates for the following quarter. The revisions behavior ahead of the Q2 earnings season was no different and most of the same sectors have experienced negative revisions this time around as well. The ‘regulars’ on the negative estimate revisions beat include Technology, Basic Materials, and Industrials. But in addition to those sectors, Retail and Consumer Discretionary have played material roles in bringing down expectations for Q3 as well.

The chart below compares the Q3 total earnings growth expected for these five sectors at the start of the quarter and where those expectations stand at present

Estimates for other sectors have come down as well, with even the Finance sector earnings expected to be up +6.2% now vs. the +8.1% that was expected in early July. Energy, Utilities, Conglomerates and even Construction have suffered negative revisions in varying degrees.

High Expectations for Q4

While estimates for Q3 have come down, the same for Q4 and the following quarters have held up fairly well, as the chart below shows.

Part of the extremely strong growth expected in Q4 is a function of easier comparisons, as 2012 Q4 represents the lowest quarterly earnings total for the S&P 500 in the last six quarters, with the comps particularly easy for the Finance sector. But it’s not all due to easy comparisons, as the expected earnings totals for Q4 represent a new all-time quarterly record. Total earnings for the S&P 500 reached a new record at $256.5 billion in Q2, surpassing Q1’s $254.1 billion record. But they are expected to reach $273.5 billion in 2013 Q4, with total earnings growth outside of Finance expected at +8.5%.

Judging by what has happened over the past year or so, these Q4 estimates will come down as companies share their outlooks on the Q3 earnings calls. The market didn’t care much as estimates came down in the last few quarters, hoping for better times ahead. Will it do the same this time as well, pushing its hopes of earnings ramp up into 2014? We will find out the answer to that question over the next two months.

The Washington Drama

Headlines from Washington DC will be all the rage this week, but we have a full docket of top-tier economic data coming out this week as well. Most of recent economic data, like Jobless Claims, New Home sales, and Personal Income/Spending has been good enough to allow the Fed to start the Taper process. But perhaps the Fed was justifiably wary of going that route in the last meeting given the coming budget/debt ceiling battles in Congress.

The most important report coming out this week is the September non-farm payroll report coming out on Friday. We will also get the two ISM surveys, the private sector jobs tally from ADP and other economic readings this week.

Monday - 9/30

  • The Chicago PMI coming out after the market opens will give us a preview of the national manufacturing ISM survey on Tuesday. The expectation is for the Chicago PMI to modestly lose ground from August’s 55.7 reading.
  • Paychex (PAYX - Free Report) is the only notable earnings release today, coming out after the close.

Tuesday - 10/1

  • We will get the September manufacturing ISM index, August Construction Spending, and September motor vehicle sales numbers coming out.
  • The expectation is for the ISM reading to modestly pullback from August’s 55.7 level, while Construction Spending is expected to show a +0.6% increase after July’s similar gain.
  • Walgreen’s (WAG) is the key earnings report in the morning, while Global Payments (GPN - Free Report) will report after the close.
  • Zacks Earnings ESP, our proprietary leading indicator of earnings surprises, is showing Global Payments to come out with a positive earnings surprise.
  • For More details on Earnings ESP, check the ESP page here.

 Wednesday - 10/2

  • We will get the September private sector jobs report from payroll processor Automatic Data Processing (ADP - Free Report) in the morning, with expectations of 175K jobs in September, essentially unchanged from August’s 176K tally.
  • Monsanto (MON) is the only notable earnings report coming out today.

Thursday - 10/3

  • Jobless Claims and the service-sector ISM survey are on the economic docket.
  • Constellation Brands (STZ - Free Report) and International Speedway (ISCA - Free Report) are the only major earnings reports today.

Friday - 10/4

  • The key economic report today is the September non-farm payroll report from the government’s Bureau of Labor Statistics (BLS). The consensus expectation is for ‘headline’ job gains of 180K vs. 169K in August.
  • No major earnings report coming out today.

Here is a list of the 20 companies reporting this week, including 4 S&P 500 members:

Company Ticker Current Qtr Year-Ago Qtr Last EPS Surprise % Report Day Time
OMNOVA SOLUTION OMN 0.22 0.16 14.29 Monday BTO
PARK ELECTROCHE PKE 0.3 0.28 -13.79 Monday BTO
PAYCHEX INC PAYX 0.43 0.42 2.7 Monday AMC
DIAMOND FOODS DMND -0.01 0.02 131.25 Monday AMC
PALATIN TECH PTN -0.04 -0.14 33.33 Monday AMC
WALGREEN CO WAG 0.73 0.53 -5.56 Tuesday BTO
ACUITY BRANDS AYI 1.02 0.88 7.78 Tuesday BTO
ACTUANT CORP ATU 0.5 0.55 -1.59 Tuesday BTO
GLOBAL PAYMENTS GPN 0.94 0.87 -3.92 Tuesday AMC
TEAM INC TISI 0.36 0.36 0 Tuesday AMC
RESOURCES CNCTN RECN 0.11 0.12 6.67 Tuesday AMC
SYNERGETICS USA SURG 0.05 0.08 66.67 Tuesday AMC
MONSANTO CO-NEW MON -0.43 -0.44 3.75 Wednesday BTO
TEXAS INDS TXI 0.05 -0.09 116 Wednesday AMC
CALAMP CORP CAMP 0.15 0.14 16.67 Wednesday AMC
NATL AMER UNIV NAUH -0.01 -0.01 -28.57 Wednesday AMC
RADIANT LOGIST RLGT 0.02 0.01 100 Wednesday N/A
CONSTELLATN BRD STZ 0.89 0.71 -7.32 Thursday BTO
INTL SPEEDWAY ISCA 0.01 0.01 0 Thursday BTO
XYRATEX LTD XRTX -0.01 0.34 230 Thursday AMC

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