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Fed Won't Raise til 2016?

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Thursday, October 15, 2015

The major indexes are on track to start today’s session in the green on continued Fed-centric hopes following a benign inflation reading and more earnings releases.

The case for the Fed lift-off arriving in the December meeting has been steadily weakening since cracks emerged the U.S. economic outlook following the soft September jobs number. What we found in the labor market numbers was that not only was September very weak, but the numbers for the preceding two months were also revised down. This was followed by more evidence of weakness in the factory sector through the ISM survey, questions about consumer spending as a result of the soft Retail Sales reading, and the complete lack of pricing pressures in this morning’s CPI report.
 
What all of this means is that the U.S. economy lost its growth momentum in a meaningful way in the September quarter, with GDP growth in the period dropping to less than 1% after the +3.9% pace in the preceding period. As would be expected, this dataflow has helped shape the market’s Fed expectations, with the Fed Funds futures market currently putting the odds of lift-off at the December meeting at about 30%.

The Fed’s public position hasn’t changed, with incoming data determining their next course of action. On paper, they will have two additional months of data when they meet for the mid-December session. But judging from what we have seen already, it remains highly unlikely that they will make the move then.
 
On the earnings front, we got a weak earnings read from Goldman Sachs (GS - Free Report) this morning while Citigroup (C - Free Report) , UnitedHealth (UNH - Free Report) were among the positive reporters. Including these and other reports this morning, we now have Q3 results from 46 S&P 500 members that combined account for 14.9% of the index’s total market capitalization.

Total earnings for these companies are up +7.7% from the same period last year on +2.6% higher revenues, with 67.4% beating EPS estimates and 45.7% coming ahead of revenue estimates. This is better earnings and revenue growth rates relative to what these same companies brought in other recent periods, but that’s primarily due to easy comparisons at Bank of America (BAC). Excluding Bank of America, total earnings for the remainder of S&P 500 companies that have reported will be down -1.3% on +3% higher revenues. The beat ratios started out strong relative to other recent periods, but appear to have lost that momentum now.
 
Looking at Q3 as a whole, combining the actual results from the 46 companies that have reported with estimates for the still-to-come 454 index members, total earnings are expected to be down -4.8% on -4.9% lower revenues. Estimates for Q4 have started to come down, with total earnings for the S&P 500 index now expected to be down -5.1% from the same period last year, which is down from an expected decline -4.7% less than a week ago.
 
Sheraz Mian
Director of Research
 
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