Ahead of Wall Street - September 20, 2012

Zacks

Thursday, September 20, 2012

Stocks have been taking solace lately from the coordinated central bank actions that have flushed the markets with liquidity, offsetting persistent questions about the growth outlook of the global economy. But the growth questions refuse to go away and keep taking center stage through a combination of weak economic readings and profit warnings from bellwether companies like FedEx (FDX) and Intel (INTC). They have failed, however, in damaging the market’s strong momentum that has pushed it to new multi-year highs.

Today’s weak purchasing managers index (PPMIQ) surveys from China and the Euro-zone provide us another reminder that the growth issue remains unresolved. The HSBC’s (HBC) preliminary September PMI reading for China modestly improved from the August level, but remained in contractionary territory (readings of under 50 mean manufacturing activities are contracting) for the 11th straight month. The continued weakness in China’s manufacturing sector shows that the Chinese authorities’ easing actions have yet to show up in economic data.

The Markit preliminary September PMI reading for the Euro-zone also came in lower than expected, highlighting the region’s persistent economic problems. The composite PMI reading, which combines the manufacturing and services sectors, fell to 45.9 in September from 46.3 in August. This was the 12th sub-50 reading for the Markit composite PMI measure in the last 13 months, indicating the region’s economy likely remained in negative territory in the third quarter as well – the Euro-zone economy contracted at a 0.7% rate in the second quarter. 

The state of the domestic factory sector is not much health either, with the ISM surveys coming in at the under-50 level over the last few months. We will get the Philly Fed regional manufacturing survey a little later today. But it may not be much better than what we saw from the New York Fed’s Empire State survey a few days back. This morning’s weak initial Jobless Claims data (382K for last week and 375.8K for the 4-week average) further confirm the lack of momentum.

This apparent disconnect will likely come to a head as the third quarter earnings season gets underway in a couple of weeks. The earnings growth expectations for third quarter remain the weakest that we have seen since the start of earnings recovery in 2009. But expectations remain high for the following quarter, with total earnings growing sharply in the fourth quarter (up +7.9% vs. down -3.4% in the third quarter). But the guidance from companies like FedEx (FDX), Intel (INTC) and Adobe (ADBE) is telling us that those earnings growth expectations may not be tenable in the current global economic backdrop.

Sheraz Mian
Director of Research 

Read the analyst report on INTC

Read the analyst report on FDX

Read the analyst report on ADBE

Read the analyst report on HBC

Zacks Investment Research


 
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

More From Zacks.com

Rates

View Comments (0)