A lot of the weakness in the ongoing third quarter earnings
season is attributable to problems in the Chinese economy. Europe
obviously is also an issue, but it's the loss of growth momentum
in China that is showing up in a range of industries this
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We have heard the China growth issue mentioned on earnings calls
from companies as diverse as
). The domestic economic picture is not that pretty either, but
it is in far better shape compared to what is going on beyond the
Given this China fixation, it would make sense for the market to
feel some ease on the sign that the country's manufacturing
sector may be improving. This morning's preliminary October PMI
) shows the measure improving to a three-month high, though it
still remains below the '50' level.
This comes after other key measures of economic activity,
particularly export growth and industrial production, also showed
signs that the economy may have bottomed already and will start
stabilizing in the coming quarters. Conclusive evidence on that
front should offset the earnings deterioration trend currently in
play. But we will likely have to wait a bit longer for that
evidence to emerge.
On the earnings front, the positive looking numbers from
) are not enough to change the overall weak tone of this
reporting season. In terms of a running scorecard, we have third
quarter results from 179 companies in the S&P 500 as of this
morning (Wednesday, October 24th).
Total earnings for these 179 companies are down 2.9% from the
same period last year, with only 57% of the companies beating
earnings expectations. On the revenue side, the growth rate is a
bit better, though only 33% of the 179 companies have come ahead
of revenue expectations.
This is a materially weaker performance than what these same
companies did in recent quarters. Importantly, the tone and
substance of guidance has been on the weaker side, which means
that we will likely see an acceleration in negative estimate
revisions over the coming days and weeks.