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ADP Jobs Stronger, Q4 Earnings Grind

Wednesday, February 3, 2016

Stocks are indicated to start today's session in positive territory, with favorable momentum in oil prices and positive labor market gains helping sentiment at the open. With respect to Q4 earnings season, we have now crossed the halfway mark with results from more than half of the S&P 500 members now out.

This morning's jobs report from payroll processor ADP ( ADP ) came in better than expected. This report which serves as a preview for the all-important monthly non-farm payroll report from the U.S. government's Bureau of Labor Statistics, showed gains of 205K in January relative to estimates of 190K and the prior-month's 267K (revised higher by 10K).

Estimates for the Friday BLS report - which currently stand at 188K per Bloomberg.com for the 'headline' and 180K for the ADP-comparable private-sector jobs - leaves room for upward revisions to estimates ahead of the release. We had a blockbuster 292K read from the BLS report in December.

Part of the deceleration in job gains from December to January is weather related. Even though these numbers are seasonally adjusted, December benefited from unusually warm temperatures, with Spring type weather around Christmas in many parts of the country. This balmy weather likely had an impact on some weather sensitive parts of the economy.

This favorable seasonality notwithstanding, the U.S. economy actually lost ground in the last quarter of 2015, with GDP growth decelerating sharply in Q4 as a result of lower contribution from inventory builds, international trade and corporate investments. Consumer spending, the biggest component of the U.S. economy, held up fairly well in the last quarter of the year, but nevertheless lost some ground from the preceding quarter's level.

The Fed implication of all of this macroeconomic backdrop is that if the Q4 slowdown is carrying to the current period then the central bank will hurry to follow up its December lift-off with another rate hike at its March 2016 meeting. The Fed had indicated four interest rate hikes at the time of the December lift-off, but developments since then particularly the market turmoil that arrived in January and monetary policy moves by central banks in Europe and Japan, has created doubts about those plans.

Markets don't see the Fed doing more than one rate hike this year, with the odds of that rate hike arriving in March increasingly on the low side. Ongoing weakness in the U.S. economy's factory sector and continued momentum in the exchange value of the dollar indicate that the Fed will have to revise its policy plans even if the unemployment rate develops a 4-handle (it was 5.0% in December) in the coming days.

Fed-watch aside, we are in the midst of Q4 earnings season, with the reporting cycle crossing the halfway mark this morning. Including this morning's reports from the likes of General Motors ( GM ), Comcast ( CMCSA ), Eaton ( ETN ) and others, we now have Q4 results from 260 S&P 500 members that combined account for 61.3% of the index's total market capitalization.

Total earnings for these companies are down -4.6% from the same period last year on -5.1% lower revenues, with 71.5% beating EPS estimates and 47.3% coming ahead of revenue estimates. Relative to the recent past, these growth rates are below the same group of 260 index members, but the ratio of companies beating or meeting earnings and revenue estimates is in-line or better than recent periods.

The blended or composite picture for the quarter - combining the actual results from the 260 index members with estimates from the still-to-come 240 companies - is for earnings to be down -6% on -4.6% lower revenues, the third quarter in a row of negative earnings growth for the index. Q4 growth would barely be in positive territory if the Energy sector drag is excluded from aggregate picture. The growth picture isn't expected to improve in the current period either, with 2016 Q1 estimates steadily coming down as companies report Q4 results and provide weak guidance for the current period.

Sheraz Mian

Director of Research

Note: In addition to this daily pre-open article about the market, economy, and the corporate earnings picture, Sheraz Mian also provides detailed earnings analysis in his weekly Earnings Trends and Earnings Preview reports. If you want an email notification each time Sheraz Mian publishes a new article, please click here .

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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 Nasdaq, Inc.


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

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