The surprising Bank of Japan action is driving investor behavior all over the world, and U.S. stocks will likely follow the lead set by their European and Asian peers, at least at the open. The excitement makes it difficult to dwell on negative readings like this morning’s weaker-than-expected U.S. consumer spending report for September, pointing towards a likely negative revision for Q3 GDP in the coming days.
That global markets are addicted to central bank actions has been well known for some time, and today’s response to the BoJ move reconfirms that. In the excitement and applause for fresh stimulus, no one is raising questions as to why it must be needed in the first place. After all, the BoJ has been maintaining a zero-interest policy much longer than the U.S. Fed’s ‘considerable time’ commitment. And they have been on their version of QE for quite some time as well.
What this shows that the BoJ’s super-loose policies thus far haven’t been enough; they are still struggling with the ‘deflation demon’ in that economy.
Instead of being spooked by this apparent admission of failure on the part of the BoJ, global markets are cheering the liquidity injection. Let’s hope that the Fed is able to continue its announced plan to exit the extraordinary policy regime; it has ended QE already, and the expectation is that it will start raising rates by the middle of next year. All of this goes on to show the level of sway that the central banks have come to exercise over global markets lately.
Central bank actions aside, we remain in the midst of the 2014 Q3 earnings season, with this morning’s reporting docket dominated by results from the energy giants Exxon (XOM) and Chevron (CVX). Both companies came ahead of estimates on strength in their refining portfolios that offset weak oil prices and declining production volumes.
The recent sharp oil price decline has surprised many in the markets, but I don’t see much more downside risk from current levels given the higher cost of marginal production from U.S. shale, which was one of the reasons for the supply growth in the first place. That said, the near-term outlook for the group remains challenging.
On the Q3 Scorecard, we now have seen results from 360 S&P 500 members, or 72% of the index’s total membership. Total earnings for these 360 companies are up +7.2% from the same period last year, with 72.3% beating earnings estimates. Total revenues are up a much stronger +4.8%, with 52.9% beating top-line estimates.
Comparing the results thus far with what we have been seeing from the same group of companies in other recent quarters in terms of growth rates, beat ratios, and guidance presents somewhat of a mixed picture. Earnings growth is weak relative to other recent quarters, but revenue growth is tracking better. Earnings beat ratios are about in-line with recent history, though revenue surprises are a bit on the weak side.
Importantly, the guidance picture remains weak, with a majority of companies providing guidance guiding lower. As a result, estimates for Q4 are following the familiar negative revisions trend that we have been seeing quarter after quarter for more than two years now. In fact, the negative revisions trend for Q4 is in some respects appears stronger than we have been seeing in other reporting cycles at comparable stage.
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