Markets, GDP and Earnings
by Rick Welch on Nov 3, 2014
Markets – October was an interesting month for investors. From a technical perspective, US Large Caps (S&P 500) just missed entering correction territory on October 15. From an intraday high of 2019.76 on September 19, the index fell 9.83% into mid October. US Small Caps (Russell 2000) did correct falling from an intraday high of 1213.55 on July 1 to an intraday low on 1040.47 on October 15, a correction of 14.26%. What a difference two weeks makes. Both indices ended the month with gains: S&P 500 (+2.32%) and Russell 2000 (+6.46%). International (-0.21%) and emerging market (+1.41%) equities did not fare as well, further demonstrating the growth divide between the US and much of the global economy. Volatility (as measured by VIX) started the month at 16.31, peaked at 31.06 (a high mark for 2014) on October 15 and ended the month at 14.0, well below the long run average of 20.0. The Barclays US Aggregate Bond Index rose 0.65% as the yield on the 10-year US Treasury bond fell from 2.51% to 2.34%. On October 15, that same yield fell to an intraday low of 1.87%, its lowest level since May of 2013.
GDP - The Advance Estimate of Q3 GDP growth released by the Bureau of Economic Analysis (www.bea.gov) showed economic activity in the US increased at an annual rate of 3.5%. This performance follows a stronger Q2 in which GDP grew at an annual rate of 4.6% and adds to the conviction that the US economic outlook is on firmer footing, with domestic growth now gaining real momentum. It is this improving picture that prompted the Fed to end its bond-purchase (QE) program in October. An examination of the different components of GDP could suggest how the stock market may move in the coming weeks. An early read shows increases (though in some cases at a slower rate of growth than Q2) in personal consumption (+1.8%), durable (+7.2%) and nondurable (+1.1%) goods, exports (+7.8%), nonresidential investment (+5.5%), investment in equipment (+7.2%) and federal government spending (+10.0%), the last component benefiting from a 16% increase in national defense spending. One negative was that investment in private inventories fell 0.57% in Q3, after a Q2 increase of 1.42%.
Earnings - The Q3 earnings season is well underway with over two-thirds of the companies in the S&P 500 having reported their quarterly earnings. Thus far, the results have been positive with over 76% reporting earnings (EPS) above estimates and 60% reporting sales above estimates. Blended earnings growth for Q3 is coming in at 7.3%, higher than the estimated Q3 earnings growth rate of 4.6% at the start of earnings season. The percentage of companies reporting EPS above estimates (76%) is above the 5-year running average of 73%. At the sector level, Industrials and Health Care have the highest percentages of companies reporting earnings above estimates. The blended Q3 sales growth rate is 3.8%, in line with the estimated growth rate at the start of earnings season. Sales declines seen generally in the Energy and Consumer Discretionary sectors have been partially offset by upside surprises in the Financials and Technology sectors. It is no surprise that the hardest hit sector is Energy which is reporting, thus far, the largest year-over-year drops in both EPS and sales. Energy is the only sector (out of 9) within the S&P 500 expected to report such year-over-year declines, a trend many analysts expect to continue for Energy through Q4 2014 and into 2015.
