Q2 Earnings Season Doing Its Part - Ahead of Wall Street


Tuesday, August 5, 2014

The market had a good day on Monday and appears on track to start today's session on modestly down note. The service sector ISM survey coming out after the market's open will likely set the tone for today's session. Uncertainty about the Fed following the recent run of positive economic readings, which is at the core of the market's ongoing tentativeness, isn't going away anytime soon.

We will see if today's non-manufacturing ISM survey will show similar momentum to what we saw from the manufacturing survey last week, but the overall tone of recent economic data has undoubtedly been positive. This should be a reassuring backdrop for stock market investors as it improves the odds of stronger corporate earnings down the road. And this is starting to show up in the ongoing Q2 earnings season where management teams have broadly been describing the business landscape in better terms than we have been seeing in recent quarters. The earnings and revenue growth numbers are better, more companies are beating estimates, and notwithstanding this morning's weak guidance from Target ( TGT ), there is even some modest improvement on the guidance front.

The updated Q2 scorecard, including this morning's releases from Coach ( COH ), Archer Daniels Midland ( ADM ) and others shows that we now have results from 398 S&P 500 members that combined  account for 86.2% of the index's total market capitalization. Total earnings for these companies are up +9% from the same period last year on +4.8% higher revenues, with 67% beating EPS estimates and 61.3% coming out with positive revenue surprises.

The revenue growth and surprises are particularly notable, with the current top-line growth pace and beat ratio the best we have seen for this group of companies in a very long time. This has started to show up in estimates for the current period, as well. Estimates for 2013 Q3 are coming down along the lines of the long-established trend, but the pace of negative revisions is lower relative to any other quarter in more than a year.

This improved earnings backdrop should have been more than enough to offset the emerging Fed-centric worries. But interest rates have as much if not more sway on stock prices as earnings do. It won't be easy to navigate this period of Fed worries, but the improvement on the earnings front is nevertheless a reassuring source of support for stocks.

Sheraz Mian
Director of Research

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Earnings , Stocks , US Markets

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