Thursday, September 11, 2014
Pre-market sentiment is indicating a weak open for today’s session, weighed down by Fed and geopolitical concerns. The geopolitical issue reflects concerns the country’s seemingly open-ended commitment to the uncertain Middle Eastern situation on this day of heavy memories.
The Fed preoccupation is the more enduring worry for investors, as the recent uptrend in benchmark treasury yields shows. Many expect the Fed to drop hints following next week’s FOMC meeting that will start preparing the markets for the coming tightening cycle.
There are two views within the FOMC, which for simplicity’s sake get characterized as the dovish and hawkish views. The dovish view, which has been in the majority and includes the Fed Chairwoman, would like to be cautious in normalizing monetary policy – delaying the tightening cycle as long as possible. The hawks, on the other hand, are concerned that the Fed is behind the curve and risks losing control over inflation and interest rate expectations.
The consensus view in the market is that the first rate increases will come somewhere in the middle of 2015, while the QE program will come to an end next month. The risk is that stronger economic data will strengthen the hands of the Fed hawks and prompt it to start the tightening cycle earlier than current consensus expectations.
The weak August jobs report and this morning’s initial Jobless Claims numbers run counter to the improving labor market narrative. Hard to read the labor market in real time, but any favorable reference to the economy in next week’s statement that discounts the August jobs report will likely get interpreted as having a hawkish bias. The Chairwoman’s post-meeting press event will also help clarify the committee members’ thinking. But recent developments in treasury yields and the dollar’s exchange value are reflecting this market expectation.
In corporate news, this morning’s release from Kroger (KR) is the last Q2 report from any S&P 500 member and helps us (officially) close the books on a positive reporting cycle. The report from Darden Restaurants (DRI) tomorrow and others like FedEx (FDX) and Oracle (ORCL) next week (for their fiscal quarters ending in August) will get counted as part of the Q3 tally. Earnings were up a better than expected +8.1% on a strong +4.4% revenue gain in Q2, with total earnings for the S&P 500 index reaching a new all-time high in the quarter.
Investors will be looking for a repeat performance in Q3, though estimates for the September quarter have come down as the quarter has unfolded. Total earnings for the S&P 500 companies are expected to be up +3.1% in Q3 on +1.4% higher revenues, with the expected earnings growth down from close to +6% at the start of the quarter.
As recent developments show, earnings aren’t the only driver of stock prices – geopolitics and interest rates are big forces as well. But earnings do play a materially important role in determining the stocks’ value in the long run. To that end, the coming earnings season will tell us whether the Q2 strength was a one-off bounce-back from the extremely low levels of the preceding quarter or the start of something more enduring.
Sheraz Mian
Director of Research
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