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Fed Hopes are Premature

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Monday, February 10, 2014

Stocks are indicated to open lower today after ending last week on a high note despite disappointing data. With not much on the docket today and the rest of this week, market action will likely reflect earnings release and further follow through to last week’s data.  

Investors will likely get disappointed if they are angling from a slower Fed Taper as a result of the recent softer economic data. The drop in the unemployment rate and uptick in participation rates do little to change the overall disappointing tone of Friday’s jobs report, the second weak labor market tally in two months. This followed the weak ISM survey and soft durable goods and factory orders readings. The unmistakable takeaway from these releases is that the economy lost some steam as it entered 2014.

The most logical explanation for the ‘slowdown’ appears to be weather which has been unusually harsh this winter. Since weather didn’t let up in February either, we will have to wait some more before moving past the weather-induced hiccup. We wouldn’t get much this week given the light economic docket, though we do have the new Fed Chairwoman’s Congressional testimony tomorrow morning. Those looking for Yellen to indicate any rethink to the Taper plan will likely be disappointed as the bar for any changes to the QE program are likely very high.  

On the earnings front, the bulk of the Q4 earnings season is now behind us, but the cycle is far from over. Including this morning’s reports from Hasbro (HAS - Free Report) and Loews Corp (L - Free Report) and others, we now have Q4 results from 346 S&P 500 members that combined account for 78.7% of the index’s total market capitalization. Total earnings for these companies are up +11.5% from the same period last year, with 69.5% coming ahead of consensus EPS estimates. Total revenues are barely positive, up only +0.5%, and 63.4% have beat revenue expectations. Lack of revenue growth stands out and is weaker than what we have seen from this same group of companies in recent quarters, with the Finance and Energy sectors as the primary drags on top-line growth.

Comparing the results from this same group of companies to the last few quarters, performance is tracking better in terms of earnings growth and earnings & revenue beat ratios. Revenue growth is notably weak this time around, but most of that is due to the Finance and Energy sectors, particularly tough comparison for Prudential Financial (PRU - Free Report) . Outside of these sectors, the revenue growth picture is not materially different from what we have been accustomed to in recent quarters.

Overall, it has been an ‘ok’ earnings season, no better or worse than other recent quarterly reporting cycles. Companies have beat earnings and revenue estimates at an above-average rate, but they continue to guide lower, prompting estimates for the current quarter to come down. This has been an ongoing trend for more than a year now, but investors have generally been not terribly concerned about this issue as the super accommodative Fed policy convinced them to look for better times ahead.

But with the Fed now getting out of the QE business and new questions about the global and U.S. growth pictures taking the spotlight, investors may not be as accommodative as they have been in the past.

Sheraz Mian
Director of Research


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