Do earnings matter? It seems as if the market moves higher
with each passing quarter, even as year-over-year earnings growth
has markedly slowed in recent quarters. Simply put, it's easy to
assume that investors aren't paying attention to quarterly
But earnings do matter, of course. They've been just good
enough to keep from spooking investors, and in the next few
weeks, expect more of the same.
There are few major headwinds in place to dampen quarterly
profits right now. If recent history is any guide, the vast
majority of companies in the S&P 500 will meet or slightly
beat third-quarter sales and profit forecasts.
Yet this is no time to become complacent. Within specific
industries, investors will be paying very close attention to the
demand environment. For example, homebuilders appear to be
holding up well enough, considering that mortgage rates have
begun to rise. Will the leading builders change their tune about
solid foot traffic in the months ahead?
Here are five other trends you'll want to track during the
coming earnings season.
|1. Where's The Consumer?
Many retailers appear to be stalling out, and analysts are
starting to lower earnings forecasts for consumer-facing
, for example, reported a weak fiscal second quarter,
highlighted by a modest drop in same-store sales, and
recent Johnson Redbook retail spending surveys haven't
shown any improvement. In a similar vein,
Carnival Cruise Lines (
is having a hard time drumming up new bookings and has
resorted to heavy discounting.
Though many retailers won't report fiscal third-quarter
results until mid-November, we'll hear from many other
consumer-facing companies in October. Tepid results from
consumer discretionary firms now will raise serious
concerns about the upcoming holiday season.
|2. Headwinds For Emerging Markets?
Leading emerging markets have endured a tough summer,
thanks to falling commodity prices, rising domestic unrest,
and central bank monetary pressures. Any U.S. companies
with considerable emerging-market exposure are bound to
dampen deliver bad news on the earnings front. The fact
that many local currencies have lost a lot of value against
the dollar likely implies a considerable drag from foreign
exchanges as well.
The market has been rewarding companies that have a
primarily U.S. focus, and that trend may continue through
earnings season as well.
|3. Can Internet Stocks Justify Their Values?
The top 10 or 15 Internet-related stocks are on fire. It's
Facebook (Nasdaq: FB)
Yahoo (Nasdaq: YHOO)
Priceline (Nasdaq: PCLN)
Netflix (Nasdaq: NFLX)
Akamai (Nasdaq: AKAM)
Apple (Nasdaq: AAPL)
have all seen their shares rise 25% or more in the third
quarter, adding tens of billions in market value. Investors
will be expecting these companies to deliver terrific
results to justify what are, in some cases, nosebleed
You could argue that the impressive stock gains are the
result of investors' new focus on long-term business
trajectories, and not the result of recent quarterly
results. In effect, the sentiment has changed, but not the
fundamentals. Yet any signs of slowing growth in internet
ad revenues, e-commerce purchasing, or digital
entertainment trends, and investors will be awfully tempted
to lock in profits.
|4. Washington's Economic Impact
As of this writing, thousands of government employees are
set to be furloughed due to the budget impasse. Even if
that issue is resolved fairly quickly, the debt ceiling
limit will be reached a few weeks later, which could create
another crisis. Considering how large the government stands
as a leading customer to many companies, and considering
the likely curtailing in spending by anyone who works for
the government, we're bound to be hearing about it on
upcoming conference calls.
There's a real possibility that the government's budget
issues will shave 0.5% or 1.0% off fourth-quarter GDP.
Listening in on the conference calls to see how companies
are affected will be a useful exercise this quarter.
|5. Airlines: Flying Too High?
In a similar vein, investors have been really warming up to
airline stocks: The AMEX Airline Index rose 17% in the
third quarter and is up by more than 60% over the past
year. As a result, many airline stocks are now trading for
close to 10 times forward earnings, which is a historically
high multiple for this boom-and-bust industry.
Yet investors may be overlooking the fact that air travel
is slowing. As the International Air Transport Association
(IATA) noted this month: "Cargo growth has not
materialized. Emerging markets have slowed. And the oil
price spike has had a dampening effect." That's not to say
that this industry is headed for trouble, but we may be
hitting a cyclical peak.
, for example, is expected to boost profits just 3% in 2014
(to $2.90 a share), as air travel demand and pricing
Risks to Consider:
Companies have moved away from pre-reporting bad results at
the end of the quarter. They're waiting instead until the
scheduled earnings date to deliver any bad news. That can lead to
sharp drops if investors feel misled -- and in this ever-rising
bull market, the punishment for any shortfalls may prove to be
more severe than usual.
Action To Take-->
Recent earnings seasons have been fairly uneventful, as many
companies deliver results that are unimpressive but just good
enough. We'll need a repeat performance if stocks are to hold
current levels, especially as the budget noise out of Washington
rises to a fever pitch.
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