Stocks have been skittish since the 'No Taper' rally last
Wednesday, with issues like the future of QE, a possible
government shutdown and the debt ceiling dominating market
discourse. Since none of these weighty issues are going away any
time soon, we should likely brace ourselves for a relatively
extended period of weakness in the market.
Another issue that has remained under the radar for some time,
but will take center stage in the coming days with the start of
the 2013 Q3 earnings season, is the underwhelming corporate
earnings picture. Total earnings growth in Q3 is expected to be
up +1.1%, down from +5.1% growth expected in early July. This
downward revision isn't unusual, as we have been seeing this
trend play out repeatedly in recent quarters. Estimates for each
quarter start out high, but come down materially as the calendar
The actual quarterly results, in the end, come ahead of these
lowered expectations and we will most likely see something
similar play out this coming earnings season as well. But more
than how companies perform relative to the lowered Q3 earnings
expectations, it is the quality of guidance for Q4 that will
determine how successful or otherwise the coming reporting season
The reason for the above-average significance of guidance this
time around is the elevated expectations for Q4. Total earnings
growth in Q4 at this stage (up +11.1%) is the highest that we
have seen for any quarter at this stage. Recent history tells us
that these elevated Q4 expectations will start coming down as
companies provide guidance in the coming days.
But how much will those estimates be cut? And more important,
will investors continue to disregard this lack of earnings
confirmation for the market's strong gains this year?
The Fed and Washington DC may be in the spotlight at present,
but discussion about earnings will likely add another negative to
the conversation soon enough.
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