By Wallace Witkowski, MarketWatch
SAN FRANCISCO (MarketWatch) -- Expect a heightened focus on revenue and corporate capital expenditure spending as
earnings season reaches its midpoint this week.
Last week, the Dow Jones Industrial Average (DJI) finished up 1.1%, the S&P 500 Index (SPX) gained 0.9% to finish at
a new record close of 1,759.77, and the Nasdaq Composite Index (RIXF) advanced 0.7% after a peak earnings week.
On the surface, results from the biggest U.S. companies appear relatively strong, and that's helped support stock
With nearly half the S&P 500 and more than two-thirds of the Dow industrials having already reported quarterly
results, the current earnings season is looking to be the best of the year in terms of how companies are beating
expectations. And S&P 500 earnings are on their way to setting a new record high.
"What's occurring is that U.S. corporations are benefitting from being the best house in a bad neighborhood," said
Brian Belski, chief investment strategist at BMO Capital Markets. Much of that has to do with corporate America
stripping away costs in a challenging global revenue environment, Belski said.
A wave of earnings beats last week significantly bumped up the percent of companies topping forecasts. After this past
week, 75% of S&P 500 companies have topped the earnings consensus this season, compared with the four-year average of
73%, according to John Butters, senior earnings analyst at FactSet. Prior to last week's reports, the earnings beat rate
had been running at 69%.
This will be a "Dow-a-day" week of quarterly results with Merck & Co. ( MRK ) on Monday, Pfizer Inc. ( PFE ) on Tuesday,
Visa Inc. ( V ) on Wednesday, Exxon Mobil Corp. ( XOM ) on Thursday, and Chevron Corp. ( CVX ) on Friday.
Plus, more than 120 companies on the S&P 500 report next week with notable releases from Apple Inc. ( AAPL ) and Biogen
Idec Inc. ( BIIB ) on Monday; Gilead Sciences Inc. ( GILD ) and Allergan Inc. ( AGN ) on Tuesday; Starbucks Corp.( SBUX ) ,
General Motors Co.(GM.XX), and Comcast Corp. ( CMCSA ) on Wednesday; along with MasterCard Inc. ( MA ) and ConocoPhillips
( COP ) on Thursday.
And Nasdaq stock Facebook Inc. (FB) reports Wednesday.
Easier to beat
Some strategists, however, are less than impressed with earnings. Earnings beats have become a less significant
metric because the results compare with lowered expectations. In late June, analysts on average forecast earnings-per-
share growth for the third quarter would be around 6% year-over-year. By the time earnings season started, they had
trimmed that growth outlook to less than 1%. The beats don't "seem to be all that clean," said Tobias Levkovich, chief
U.S. strategist at Citi Research, in a recent note.
"Moreover, a good number [of companies] have made or topped forecasts on lower than expected tax rates or one-time
items, suggesting that results were not necessarily comprised of high quality beats," Levkovich noted. "Accordingly, it
is challenging to argue that the reporting season has been all that good when some detailed insight is applied."
Also, corporations giving outlooks for the fourth quarter continue to be negative, which places pressure on analysts
to lower their estimates. About 86% of fourth-quarter earnings outlooks (49 out of 57 companies on the S&P 500) have
been negative, meaning the forecast falls below the current Wall Street consensus, according to Butters. Over the past
five years, on average, about 63% of companies giving a quarterly earnings outlook provided one that's below the
With much of corporate America still conservative about costs, a metric that's useful to look out for is a company's
mention of capital expenditure spending, Belski said. A prime example of that was Microsoft Corp. ( MSFT ) earnings last
week. Not only did Microsoft top earnings estimates but revenue was $730 million higher than the Wall Street consensus
due to a big boost in spending from businesses.
Given excess volatility in Europe and emerging markets, expect to see more of an acceleration of capital expenditure
spending going into 2014, Belski said.
Revenue may be a cleaner indicator during earnings season because fewer companies on average are managing to top
consensus estimates. Revenue beats for the S&P 500 are actually running below the four-year average of 59% this season
with only 52% of companies reporting top-line results above the Wall Street consensus, according to Butters.
One group that's beating the average so far this season is a list of 20 companies, excluding financial and utilities,
that Goldman Sachs estimated would be top contributors to third-quarter revenue growth on the S&P 500. So far, nine out
of 11 companies on that list, or 82%, have beaten the revenue consensus by an average 1.6%, according to FactSet data.
The big upside surprises go to Freeport-McMoRan Copper & Gold Inc. ( FCX ) (8.7% above consensus with $6.17 billion in
revenue) and Microsoft (4.1% above consensus with $18.53 billion in revenue.)
The other companies on the list that beat revenue estimates were Ford Motor Co.( F ) , Google Inc.( GOOG ) , Amazon.com
Inc.( AMZN ) , WellPoint Inc.( WLP ) , McKesson Corp.( MCK ) , Boeing Co.(BA) , and Verizon Communications Inc. ( VZ ).
UnitedHealth Group Inc. ( UNH ) and United Technologies Corp. ( UTX ) missed the revenue consensus.
Companies on the Goldman list reporting this week include LyondellBasell Industries NV ( LYB ), Aetna Inc.( AET ) ,
AmerisourceBergen Corp. ( ABC ) , Chevron, Marathon Petroleum Corp. ( MPC ) , and Eaton Corp. (ETN).
Less impact from the Fed
On Tuesday, the Federal Open Market Committee will kick off its two-day policy meeting. Expectations are very low for
any action to taper the Fed's $85 billion a month in asset purchases.
With soft economic numbers and the Fed's decision not to taper in September ahead of the government shutdown, isolated
daily data points are less likely to drive investors to act as the focus turns to longer-term trends on whether the
economy is softening or firming up, Belski said.
"The Fed's not going to taper for a while," Belski said. "Bernanke foreshadowed that in September."
Many forecasters estimate that a tapering of asset purchases won't happen until least March or April.
on tap next week includes the Case-Shiller home price index and consumer confidence index on Tuesday, Chicago PMI on
Thursday, and the ISM manufacturing index on Friday.
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