5 Major Trends That Will Shape This Earnings Season
Do earnings matter? It seems as if the market moves higher with each passing quarter, even as year-over-year earnings growth has markedly slowed in recent quarters. Simply put, it's easy to assume that investors aren't paying attention to quarterly updates.
But earnings do matter, of course. They've been just good enough to keep from spooking investors, and in the next few weeks, expect more of the same.
There are few major headwinds in place to dampen quarterly profits right now. If recent history is any guide, the vast majority of companies in the S&P 500 will meet or slightly beat third-quarter sales and profit forecasts.
Yet this is no time to become complacent. Within specific industries, investors will be paying very close attention to the demand environment. For example, homebuilders appear to be holding up well enough, considering that mortgage rates have begun to rise. Will the leading builders change their tune about solid foot traffic in the months ahead?
Here are five other trends you'll want to track during the coming earnings season.
|1. Where's The Consumer?|
Many retailers appear to be stalling out, and analysts are
starting to lower earnings forecasts for consumer-facing
, for example, reported a weak fiscal second quarter,
highlighted by a modest drop in same-store sales, and
recent Johnson Redbook retail spending surveys haven't
shown any improvement. In a similar vein,
Carnival Cruise Lines (
is having a hard time drumming up new bookings and has
resorted to heavy discounting.
Though many retailers won't report fiscal third-quarter results until mid-November, we'll hear from many other consumer-facing companies in October. Tepid results from consumer discretionary firms now will raise serious concerns about the upcoming holiday season.
|2. Headwinds For Emerging Markets?|
Leading emerging markets have endured a tough summer,
thanks to falling commodity prices, rising domestic unrest,
and central bank monetary pressures. Any U.S. companies
with considerable emerging-market exposure are bound to
dampen deliver bad news on the earnings front. The fact
that many local currencies have lost a lot of value against
the dollar likely implies a considerable drag from foreign
exchanges as well.
The market has been rewarding companies that have a primarily U.S. focus, and that trend may continue through earnings season as well.
|3. Can Internet Stocks Justify Their Values?|
The top 10 or 15 Internet-related stocks are on fire. It's
Facebook (Nasdaq: FB)
Yahoo (Nasdaq: YHOO)
Priceline (Nasdaq: PCLN)
Netflix (Nasdaq: NFLX)
Akamai (Nasdaq: AKAM)
Apple (Nasdaq: AAPL)
have all seen their shares rise 25% or more in the third
quarter, adding tens of billions in market value. Investors
will be expecting these companies to deliver terrific
results to justify what are, in some cases, nosebleed
You could argue that the impressive stock gains are the result of investors' new focus on long-term business trajectories, and not the result of recent quarterly results. In effect, the sentiment has changed, but not the fundamentals. Yet any signs of slowing growth in internet ad revenues, e-commerce purchasing, or digital entertainment trends, and investors will be awfully tempted to lock in profits.
|4. Washington's Economic Impact|
As of this writing, thousands of government employees are
set to be furloughed due to the budget impasse. Even if
that issue is resolved fairly quickly, the debt ceiling
limit will be reached a few weeks later, which could create
another crisis. Considering how large the government stands
as a leading customer to many companies, and considering
the likely curtailing in spending by anyone who works for
the government, we're bound to be hearing about it on
upcoming conference calls.
There's a real possibility that the government's budget issues will shave 0.5% or 1.0% off fourth-quarter GDP. Listening in on the conference calls to see how companies are affected will be a useful exercise this quarter.
|5. Airlines: Flying Too High?|
In a similar vein, investors have been really warming up to
airline stocks: The AMEX Airline Index rose 17% in the
third quarter and is up by more than 60% over the past
year. As a result, many airline stocks are now trading for
close to 10 times forward earnings, which is a historically
high multiple for this boom-and-bust industry.
Yet investors may be overlooking the fact that air travel is slowing. As the International Air Transport Association (IATA) noted this month: "Cargo growth has not materialized. Emerging markets have slowed. And the oil price spike has had a dampening effect." That's not to say that this industry is headed for trouble, but we may be hitting a cyclical peak. Delta ( DAL ) , for example, is expected to boost profits just 3% in 2014 (to $2.90 a share), as air travel demand and pricing flatten.
Risks to Consider: Companies have moved away from pre-reporting bad results at the end of the quarter. They're waiting instead until the scheduled earnings date to deliver any bad news. That can lead to sharp drops if investors feel misled -- and in this ever-rising bull market, the punishment for any shortfalls may prove to be more severe than usual.
Action To Take--> Recent earnings seasons have been fairly uneventful, as many companies deliver results that are unimpressive but just good enough. We'll need a repeat performance if stocks are to hold current levels, especially as the budget noise out of Washington rises to a fever pitch.