Stocks aren’t expected to do much ahead of the Fed announcement later this afternoon that is expected to end the QE program and also change key phrases in the post-meeting statement. Earnings also remain in the spotlight, with the Q3 earnings season passing the halfway mark today.
The Fed is exiting the bond purchase program, but the idea of bond purchases as a monetary policy tool is no longer unusual and extraordinary as it was back in 2008 when first put in use. Having been employed three times in the last six years, many investors will continue to expect something along QE lines from the Fed in times of trouble, particularly if interest rate cuts aren’t an option given their extraordinarily low levels.
The element of interest in today’s Fed statement will be language about the timing of the first rate hike. The statement has thus far been assuring the markets that the Fed will keep interest rates low for a ‘considerable time’ after QE’s end. And in one of her apparently off-the-cuff remarks, the Chairwoman had defined the term to mean a period of about six months. We never heard the Fed repeat that definition of ‘considerable time,’ but it did help frame consensus market expectations that they will make the first rate hike around mid-2015, a little over six months after the bond-program ends in October 2015.
With this meeting ending the QE program, the committee will need to change, or at least tweak, this phrase. If they decide not to make a change this time around, this will likely reflect that the December meeting would offer a better opportunity for doing just that — the Fed meeting will be followed by the Chairwoman’s press event.
On the earnings front, we are now past the halfway mark, with results from 57.2% of the S&P 500 index already out. Including this morning’s results from Eaton Corp (ETN), Ralph Lauren (RL) and others, we now have Q3 results from 287 S&P 500 members that combined account for 66.8% of the index’s total market capitalization. Total earnings for these 287 companies are up +6.5% from the same period last year, with 71.8% of the companies beating earnings estimates. Total revenues are up a much stronger +5.1%, with 53.7% 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. And with no improvement on the guidance front, estimates for Q4 have starting coming down along the familiar negative revisions trend that we have been seeing quarter after quarter for more than two years now.
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