The stock market is hoping for the Senate negotiations to result
in a deal and all indications are that a deal will get announced
sometime today. This will be no more than a
kick-the-cane-down-the-road type of solution, but it will
nevertheless help move past this issue and start focusing on things
that really matter to the market, like the Q3 earnings season which
moves into high gear starting today.
The picture emerging from the first big day of the Q3 reporting
cycle today is a mixed one, with weak-looking results from Coca
Cola (KO) and Citigroup (C ) and a handy beat from Johnson &
Johnson (JNJ). Other major reports on deck today include Intel
(INTC) and Yahoo (YHOO) that will report after the close. Including
this morning's reports, we now have Q3 results from 35 S&P 500
Total earnings for these 35 companies are up +7.9%, with 51.4%
coming ahead of consensus earnings expectations. Total revenues are
up +2.5% and 40% are beating top-line expectations. The results
thus far are weaker than what we have seen for this same group of
companies in recent quarters. The +7.9% earnings growth in Q3 for
these companies compares to +17.7% in Q2 and the 4-quarter average
of +15.6%, while the +2.5% revenue growth is below Q2's +6.3% and
the 4-quarter's average of +5.4%. The beat ratios are similarly
As we have been saying here repeatedly, the key aspect of this
earnings season is not so much the growth rates and beat ratios for
Q3, but rather the evolving expectations for Q4. Consensus
expectations have been looking for a rebound in earnings growth in
Q4, which then continues into the following quarters. The
persistent pattern for more than a year has been for companies to
guide lower for the current quarter as they report last quarter's
results, prompting analysts to cut estimates.
It is still early in the Q3 reporting cycle, but we have started
seeing Q4 earnings estimates come down a bit in recent days.
Investors didn't care much in the earlier episodes of negative
revisions and many are hoping for a repeat performance this time
around as well. But that's not a given and the coming days of
estimate cuts could become a more serious headwind for the market
than the Washington worries.
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