Wednesday, July 9, 2014
Stocks appear on track to open in the green following two days of
modest losses. But with nothing major on this morning's economic
and earnings calendars, trading will likely be listless and
directionless, at least in the first half of the session. The Fed
minutes this afternoon could be material, but are unlikely to carry
many surprises. Overall, stocks remain in a wait-and-see mode ahead
of the Q2 earnings season.
On the earnings front,
) positive earnings report is welcome, but offers hardly any
assurance about the broader corporate earnings picture beyond its
own space. We have just a handful of other companies reporting this
week, the notable being
) on Friday.
But the reporting cycle really ramps up next week with more than 60
S&P 500 members coming out with Q2 results, including all the
major banks and brokers and a number of key technology players. We
will have a good cross-section of Q2 results by the end of next
week from which to start drawing preliminary conclusions.
What would investors be looking for in Q2 results? With total
earnings for the S&P 500 expected to be up +3% from the same
period last year, having fallen from consensus expectations of
+5.5% growth at the start of the quarter, growth expectations
remain muted. We should note, however, that Q2 estimates didn't
fall as much as was the case in other recent quarters, including
The favorable growth sentiment in the analyst community as
reflected in the modestly lower pace of negative revisions to Q2
estimates also shows up in estimates for 2014 Q3 and beyond, which
represent a notable ramp-up in the growth trajectory. Earnings are
expected to be up +5.6% in Q3 and +8.9% in Q4, with the growth pace
expected to accelerate further in the following quarters.
Investors will be looking for how expectations for Q3 and beyond
evolve as the Q2 reporting cycle unfolds in the coming days. The
pattern that has been in place for almost two years now is for
these estimates to start coming down as management teams share
their business outlook on the earnings calls.
The U.S. economy is believed to have done a lot better in Q2 after
the shocking pullback in the preceding quarter. But it's far from
clear at this stage whether the Q2 bounce-back will continue into
the second half of the year and beyond. It will be interesting to
see whether management commentary on the Q2 earnings calls will
offer any clarity about the business and economic outlook.
Beyond earnings, the economy's growth trajectory in Q3 has
implications for Fed policy as well, with many in the market
suspecting that a sustained rebound will force the central bank's
hands in starting to tighten earlier than currency projected.
Minutes of the Fed's June meeting coming out this afternoon may not
shed much light on this issue, but this remains a core
preoccupation for investors.
Director of Research
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