Wednesday, July 17, 2013
Bernanke’s Congressional testimony is the major economic event of the day, with investors looking for more clarity on the expected changes to the QE program. The prepared remarks released ahead of time didn’t offer any fresh insights, but the focus will be on the post-testimony Q&A session. My sense is that Bernanke’s goal in his two days of testimonies before both chambers of Congress today and tomorrow, likely his last as Fed Chairman, will be to stay on script and not rock the boat.
The Fed’s stated position is that if the economy continues to improve as they expect it would, then ‘Tapering’ will start later this year and the QE program will end altogether by the middle of next year. Bernanke reiterated last week that even if they started ‘tapering’ the QE program, short-term interest rates will remain low for a very long time. This will likely remain the gist of this testimony today as well.
A lot will depend on how the economic picture evolves over the coming months. We have had decent job growth in the recent past, averaging close to 200K a month over the last 9 months or so. Interestingly, this job creation performance has taken place in a backdrop of sub-par economic growth, with GDP growth no bette than roughly 1.5%. The apparent disconnect between the labor market and the broader economy doesn’t make sense. Something has to give, either job growth has to slow down or the economy has to pick up speed. The broader consensus in the market and a majority within the FOMC is for the economy to accelerate its growth pace.
We know that the U.S. economy lost momentum in the second quarter, with Q2 GDP growth barely above the +1% level. We will know more as the Q2 GDP numbers come out later this month, but pretty much all the building blocks of the Q2 GDP report are known at this stage. What we don’t know is where the actual GDP growth will lie in the +0.5% to +1.5% range. The hope is that the growth picture starts sustainably improving from Q3 onwards, giving better GDP growth in the second half of the year compared to the first half and better growth next year compared to this year.
This better second-half expectation is reflected in earnings estimates as well, with consensus expectations for the back half of the year reflecting a material ramp up in the growth pace. We will know more about the second half earnings outlook as more companies provide guidance for Q3 and beyond in the ongoing Q2 earnings season. We are getting into the thick of the Q2 earnings seeason with 20 S&P 500 companies reporting results today.
Reports from Bank of America (BAC), PNC Financial (PNC), Northern Trust (NTRS) and others this morning reconfirm the strong growth trend that we have repeatedly been seeing this earnings season from the Financial Sector. Including this morning’s earnings reports, we now have Q2 reports from 48 S&P 500 companies that combined account for 14.7% of the index’s total market capitalization. The Finance sector is heavily in these early reports, with Q2 results from almost 40% of the sector’s total market capitalization already known.
Total earnings for these 48 companies are up +15.6% from the same period last year, with 60.4% beating expectations. On the revenue side, we have a growth rate of +5.5% and 43.8% of the companies are coming ahead of top-line expectations. The earnings and revenue growth rates seen thus far, admittedly heavily weighted towards Finance, are better than the 4-quarter average for the same set of companies, though the beat ratios are a bit on the weak side. Total Finance sector earnings are up an impressive +31.7%, while the sector’s revenues are up +11.4%, a better performance than what we saw from the group in Q1 and the 4-quarter average.
There is not much growth outside of Finance, with the composite Q2 earnings growth rate for the S&P 500 (combining the 48 reports that have come out with the 452 still to come) currently at +1.4%. Excluding Finance, the composite Q2 earnings growth for the S&P 500 drops to a decline -3.6% from the same period last year. The Technology sector is a big drag on earnings growth, with total earnings for the sector expected to be down -8.4%. We will get a good sense of the sector’s earnings picture with today’s results from IBM (IBM) and Intel (INTC) after the close.
Director of Research