Stocks have plenty to chew on in today's session, ranging from
a solid GDP report to a barrage of earnings releases and a major
deal out of
) ahead of its earnings release after the close today. Sentiment
is on the positive side at the open, but the emerging market
angst is very much with us and could cause the opening gains to
dissipate later in the session.
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The GDP report is very reassuring even though 'headline' growth
rate of +3.2% was a tad bit short of expectations. The report's
internals are very strong, with consumer and business spending
strength offsetting surprising weakness in government spending
and housing (residential fixed investments). Most economists were
looking for flat government spending, with the decline likely a
function of the shutdown. The housing shortfall is likely a
function of weather related factors as other indicators continue
to show momentum in the sector.
Adjusting for government spending and housing, Q4 GDP growth
would have been close to Q3's +4.1% pace. Estimates for the
current quarter remain in the +2% vicinity, with growth expected
to accelerate in the following quarters. But keep in mind that
initial estimates for Q4 GDP growth were as low as +1%, but
kept going up as the quarter unfolded. What all of this boils
down to is that U.S. economy accelerated to a materially higher
growth pace in the second half of 2013 and that momentum is
expected to carry into this year and beyond.
Also dominating the headlines this morning is Google's deal to
sell its Motorola business to China's
. Google will retain most of the patents that were supposedly the
motivation for its Motorola purchase in the first place.
Importantly, the deal makes Lenovo a major player in the Android
space, creating a major rival for Samsung by bringing down the
company's dominant position in the Android landscape. Google's
exit from direct handset manufacturing may be perceived as having
) purchase. But these are two different situations as Microsoft
needs to establish Windows as a credible operating system in the
mobile space and needs a dedicated manufacturer to produce the
handsets. Google never had that problem. In fact, its Motorola
purchase put it in competition with other handset makers in the
crowded Android space.
On the earnings front, this morning's barrage of earnings reports
takes us past the halfway mark in the 2013 Q4 reporting season,
with results from more than half of the market capitalization of
the S&P 500 already out. Total earnings for the 212 S&P
500 members that have reported results (55% of the index's total
market capitalization) are up +14% from the same period last
year, with 71.2% beating earnings expectations. Total revenues
are up +2.3%, with 52.8% beating revenue expectations.
This the best earnings performance of 2013 for this group of
companies in terms of growth rates and beat ratios. That said, we
haven't seen much difference on the guidance front, with
companies still providing an underwhelming outlook for the
current and coming quarters. As a result, estimates for current
quarter have been steadily coming down as the Q4 reporting season
has unfolded. Total earnings for the S&P 500 are now expected
to be down -1.2% in 2014 Q1 compared to expectations of +2%
growth at the start of the month. What this means is that the
negative estimate revisions trend that we have been seeing
quarter after quarter for more than a year will remain with us
The market didn't pay much attention to this revisions trend the
last couple of years, but the ongoing emerging market scare is
making investors realize that they need to be a bit more
attentive to fundamentals. May be the improving domestic economic
landscape, as this morning's GDP shows, will reverse the negative
trend in estimate revisions going forward. We haven't seen any
evidence of that in the earnings data as yet.