Thursday, January 24, 2013
We will see a very interesting interplay of competing forces in today’s market action, with the Apple (AAPL) overhang and the strong Jobless Claims numbers pushing stocks in opposite directions. The positive looking data out of China about that country’s factory sector will likely tilt the balance in favor of the bullish forces. After all, the Apple miss notwithstanding, the overall tone of fourth quarter earnings reports has been reassuring enough to belie pre-season fears.
I had been skeptical of buying into last Thursday’s huge drop Jobless Claims, suspecting that perhaps seasonal factors so prevalent in this part of the year had been at play. But this morning’s further drop in Jobless Claims provides further confirmation that momentum in the labor market may be shifting. Initial Jobless Claims dropped 5K last week to 330K, while the consensus expectation was for a reversal to the preceding week’s drop and an increase to 360K. The four-week average dropped by 8.3K to 351.8K, the lowest level since early 2008.
If sustained over the coming weeks, this will represent a major positive change in the economic picture, as big and consequential as the ongoing housing recovery. When you combine this emerging labor market trend (two weeks of data doesn’t qualify as a trend, but still) and the improving housing story, you have enough material to get optimistic about the domestic economic scene. Add to this today’s report about the preliminary January PMI data out of China and you have the makings of a positive picture about the global economy.
The ongoing Q4 earnings season may not be showing much growth and momentum, but if the economic indicators keep improving as this morning’s Jobless Claims data and China’s PMI reading shows, then one could expect for the trend to reverse. Including results this morning from 3M (MMM), Bristol Myers (BMY), Grainger (GWW) and others, we now have Q4 results from 129 companies in the S&P 500 that combined account for 35.4% of the index’s total market capitalization.
We still have a long way to go in the reporting season, but we have enough of a sample size to start passing judgments. The most obvious conclusion is that the earnings picture may not be improving and growth may have flat lined, but it isn’t deteriorating either. Importantly, outside of a few notable players, the overall tone of company guidance has not been as bad as many of us had started fearing in the run up to the earnings season.
Total earnings for the 129 companies are up +0.9% from the same period last year, with 62.8% beating earnings expectations and a median surprise of +2.5%. Revenues are up +5.8%, with 55.8% of the companies coming ahead of top-line expectations with a median revenue surprise of +0.6%. This is better performance than what this same group of 129 companies reported in the third quarter. The composite growth rate for the fourth quarter, where we combine the results of the 129 companies that are out with the 371 still to come, is for a drop of -0.1% in total earnings and a –0.6% drop in revenues. In the third quarter, total earnings were down -0.1% while total revenues were -0.7%.
As such, while earnings reports are better relative to pre-season expectations, there is no effectively no growth. Even the mighty Apple had flat earnings relative to the same period last year despite generating 18% more in revenues.
Director of Research