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 (PMI) 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
ADOBE SYSTEMS (ADBE): Free Stock Analysis
Report
FEDEX CORP (FDX): Free Stock Analysis Report
HSBC HOLDINGS (HBC): Free Stock Analysis Report
INTEL CORP (INTC): Free Stock Analysis Report
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