Stocks appears on track to maintain the modestly negative tone
of recent trading sessions, giving us the first negative week in
almost two months. This is likely nothing more than summer time
behavior, with investors taking profits ahead of an extended
low-news, low-volume period.
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The flow of economic data lately has generally been positive. The
outlook for the U.S. economy was all along favorable, but recent
data appears to be indicating improvement and stabilization in
other markets as well. This morning's better than expected
Chinese industrial production data adds to other recent reports
from that country, including this week's trade numbers,
indicating that the decelerating trend may have started to ease.
Reports out of Europe appear encouraging as well, with the
momentum in Germany particularly positive.
If this improving economic backdrop has to provide confirmation
for the stock market's strong year-to-date gains, then it needs
to start showing up in positive revisions to earnings estimates.
We haven't seen that yet. In fact, estimate revisions activity
has generally been to the down side for more than a year now and
we are seeing that same trend at play in estimates for Q3 now,
with estimates sharply down relative to where they stood just a
few weeks back. This trend isn't in-sync with a market at these
Including this morning's
) and Thursday evening's
) reports, we now have Q2 results from 452 S&P 500 members or
90.4% of the index's total membership. The Q2 earnings
season has ended for 9 of the 16 Zacks sectors, including
Finance, Utilities, Energy, Basic Materials, and Construction. A
total of 13 S&P 500 companies report Q2 results next week,
Total earnings for these 452 companies are up +2.9%, with 66.4%
beating earnings expectations. On the revenue side, we have a
growth rate of +2.2%, with 55.1% coming ahead of top-line
expectations. This compares to total earnings growth rate of
+2.6% on +1.9% higher revenues in Q1 for the same group of 452
companies. In terms of beat ratio, 66.6% of these 302 companies
had come out with positive surprises in Q1, while only 43.8% had
beat on top-lines in Q1. What this tells us that the growth rates
and earnings beat ratio are broadly in-line with what we saw in
Q1, while favorable top-line surprises are a bit more common.
This aggregate Q2 picture changes materially once the Finance
sector is excluded. Total earnings growth turns negative (-3%
excluding Finance vs. +2.9% including Finance) and even the beat
ratios are far less numerous. This lack of breadth in the growth
picture is troubling given loftier growth expectations from these
sectors in the coming quarters. Given what we have seen outside
of Finance in Q2, we will have to bring those expectations down
to more realistic levels. That process has started already, but
it still has plenty of room to go.