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Will the Earnings Recession Continue in Q3?

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Thursday, September 29, 2016

All during Q2 earnings season — which analysts rightly conceded would again be in negative territory for the fifth consecutive quarter — there was speculation that the margin of aggregate earnings losses in the S&P 500 was dwindling, and might reverse in Q3. Two weeks away from the unofficial start of earnings season, this no longer appears to be the case.

It’s been de rigueur that expectations soften ahead of earnings reports — all the better to beat expectations with when they actually do come out. But with downward revisions continuing, even accelerating, this close to earnings season, the numbers suggest the earnings recession will continue for a sixth straight quarter.

Of course, positive results across key sectors may push S&P 500 earnings into positive territory after all, though the amount of companies posting downward revisions and the average share price of those revisions are both larger than historic averages. Oil prices have a lot to do with this. Prices per barrel well below $50 per share (recall a barrel of oil was $147 per barrel at one point) dampen global business across many industries.

To that end, there was some positivity wringed out of yesterday’s concluded two-day OPEC meeting. Basically, the major oil-producing countries have agreed to make some sort of cut to global oil production when the group meets again in late November. The world’s largest oil producer, Saudi Arabia, may cut up to 1 million barrels per day, but it’s unclear to what extent Iran will cut production, if at all. Plenty can happen between now and then, of course, but we’ll take positive news where we can get it.

New Econ Data Before the Bell

Our third and final look at Q2 GDP growth was released today, raised to a 1.4% annualized rate from the second read’s 1.1%. Personal Consumption Expansion quarter over quarter was 1.8%, with Personal Consumption ticking down to 4.3% from 4.4%. Still tepid growth, but the personal consumer is certainly doing his/her part.

Initial Jobless Claims posted 254K in the past week, a 3000 jump from a slightly revised previous week. But the total suggests strength in the U.S. labor market continues, which may be a useful positive indicator for next week’s Bureau of Labor Statistics (BLS) non-farm payroll report a week from tomorrow.

Our Trade Deficit result of $58.4 billion was another positive surprise from expectations of $62 billion.

Market futures are down at this hour, but have trimmed losses following these largely positive economic reports being released. Next week will be big for more econ reads, and we’ll follow that up with the Alcoa (AA - Free Report) earnings report the following week, so please stay tuned…

Mark Vickery
Senior Editor

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