The high victory margin for the anti-austerity party in the Greek elections over the weekend has added an element of uncertainty to the markets, but last week’s European Central Bank (ECB) action has helped cushion the markets to a large extent. Greece aside, market participants will be focused on the Q4 earnings season, with the reporting cycle ramping up materially this week.
The markets’ sanguine reaction to the Syriza Party win in the Greek elections reflects the reality that the election outcome was hardly a surprise. That said, Syriza’s margin of victory was bigger than expected. But it isn’t unreasonable to believe, as many in the markets seem to, that the new Greek leaders will have to find a way to compromise with its troika of international creditors.
It’s one thing to make outrageous claims while running for office, but assuming leadership responsibilities has a way of channeling behavior in the desired direction. After all, Euro-Zone leaders may not be as averse to let Greece exit the currency union compared to a few years back when the region’s banks were a lot more exposed. But beyond these reasons is the fact that last week’s action by ECB President Mario Draghi has given the markets enough ammunition to withstand the new Greece-centric worries.
Beyond Greece, we are in the midst of the 2014 Q4 earnings season — this week is the busiest of the reporting cycle so far, with more than 130 S&P 500 companies reporting results. Including this morning’s reports from D.R. Horton (DHI), Norfolk Southern (NSC) and others, we now have Q4 results from 97 S&P 500 members that combined account for 26% of the index’s total market capitalization. Total earnings for these companies are up +3.2% on +2.2% higher revenues, with 72.2% beating EPS estimates and 49.5% coming ahead of top-line expectations. Finance is a big drag on the aggregate results at this stage, but the growth picture would be weak relative to other recent quarters even after excluding Finance from the numbers.
Earnings reports the rest of this week could change the picture, but at this stage Q4 is tracking below other recent quarters in terms of growth rates and revenue surprises. The one area in which the Q4 earnings season is doing better relative to the last few reporting cycles is with respect to earnings beat ratios – not many companies are beating revenue estimates, but the ratio of companies coming ahead of EPS estimates is tracking levels above the recent past.
Another notable aspect of this earnings season is the magnitude of negative revisions for the current and following quarters, with estimates for 2015 Q1 and Q2 falling sharply in recent days. With the bulk of the Q4 reports still ahead of us, there is likely still plenty of downside to these estimates.
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