Stocks were down on Tuesday and early indications show that Wednesday may be no better. The market’s tentativeness is not because of any fresh signs of economic trouble or problems on the corporate earnings front or even questions about the global backdrop. If anything, recent developments on those fronts are by and large very encouraging.
The only source of fresh uncertainty at present is about the timing of Fed Taper. The government shutdown and its effects on economic data, coupled with the scheduled leadership change at the Fed, had convinced investors that Taper wasn’t on the cards at least through April 2014. But the recent positive turn in economic data, from the private sector’s ISM surveys to the government’s Q3 GDP and October non-farm payroll numbers, appear to show a lot more resilience in the economy. This has increased the odds that Taper could get underway as soon as at next month’s Fed meeting. The recent uptrend in treasury bond yields and movements in foreign exchange markets are clearly pointing in that direction.
I see the logic of these emerging expectations and believe that we will get a December Taper if economic data from here onwards maintains the momentum that we have seen lately. As stated here before, a December Taper will cement Bernanke’s legacy and will make life easier for Janet Yellen. Will likely get a reiteration of current Fed thinking in Janet Yellen’s Senate confirmation hearings that get underway on Thursday.
On the earnings front, we got better than expected top- and bottom-line results from Macy’s (M) this morning. It is perhaps reasonable to interpret the absence of any negative commentary from Macy’s report as positive for the holiday shopping season. Wal-Mart’s (WMT) report Thursday morning will give us a more comprehensive look at the state of the consumer and whether the government shutdown had any effects on spending. Cisco (CSCO) will be the key report after the close today.
We now have Q3 results from 453 S&P members. Total earnings for these companies are up +4.7%, with 65% coming ahead of consensus earnings expectations. Total revenues are up +3.1% and 42.7% are beating top-line expectations. The composite earnings and revenue growth rates for Q3, combining the results for the 453 companies that have reported with the 47 still to come, are +4.4% and +2.9%, respectively.
This has been an overall positive earnings season, with the earnings and revenue growth rates better than the first half’s pace. But most companies have continued to guide lower, prompting estimates for the coming quarters to come down. Total earnings in Q4 are now expected to be up +7.2%, down +11.7% growth expected in early September. This negative revision is nothing new, we have been seeing this trend play out quarter after quarter. But the market has largely been shrugging it, hoping for better times ahead on the earnings front.
My theory on this is that the ever-supportive Fed has been instrumental in putting investors in a forgiving mood. But it’s far from clear whether they will remain in that mood in a post-QE world. We will have to wait and see.