Tuesday, November 4, 2014
With not much on the domestic economic calendar, headlines about lowered European growth outlook and a slew of earnings reports provide the backdrop for today’s trading action. The remainder of this week brings a number of key economic reports that are expected to reconfirm that the outlook for the U.S. economy is steadily improving.
The European Commission’s downgrade of the common currency region’s growth outlook reconfirms the growth divergence between the U.S. and European economies. The Commission, which is the executive arm of the EU, now expects the region’s economy to grow at +0.8% this year and +1.1% next year, down from its late Spring estimates of +1.2% and +1.7% for 2014 and 2015, respectively. The growth downgrade, which the Commission blamed on the Ukraine situation and conflict in the Middle East, is nothing more than confirmation of what most of us knew already: the region’s growth picture has steadily been sliding in recent months, in contrast to the improving outlook for the U.S. economy.
We will get the latest read on the U.S. jobs market this Friday, but yesterday’s manufacturing ISM report shows that growth in the current quarter is on track to continue the prior-quarter’s momentum. We have been seeing this growth divergence story play out repeatedly in the ongoing Q3 earnings season, which is now three quarters of the way done. Management teams have been complaining about the tough operating environment internationally and growth opportunities in the home market, with the unfavorable exchange rate movement adding to the headwinds.
On the earnings front, Michael Kors (KORS) came out with better-than-expected top and bottom-line results, but it’s same-store sales numbers and current quarter guidance likely left many investors disappointed. Unlike Michael Kors, the newly renamed CVS Health (CVS) not only came ahead of estimates, but also guided higher. Alibaba (BABA) matched EPS estimates on modestly higher revenues in its first quarterly release after its IPO. Including these and other reports this morning, we now have Q3 results from 392 S&P 500 members, or 78.1% of the index’s total membership.
Total earnings for these 392 companies are up +7.2% from the same period last year, with 72.4% beating earnings estimates. Total revenues are up +3.6%, with 53.3% 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.
The earnings and revenue growth rates are tracking below the prior quarter’s levels, though they do represent an improvement over the averages for the preceding four quarters. With respect to beat ratios, more companies are beating on the bottom line, but a smaller proportion of companies are able to beat revenue estimates.
Importantly, the guidance picture still 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 appears even more pronounced relative to what we saw in other recent reporting cycles at comparable stage.
Sheraz Mian
Director of Research
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