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Friday Market Signs Looking Green

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Friday, January 22, 2016

Optimism about global central banks and gains in oil prices is helping the major indexes with plenty of green at the open. The trigger for the market's mood shift was Mario Draghi's strong Thursday comments, which has helped raise the market's hopes from next week's Fed meeting as well.

Mario Draghi's strong commentary on Thursday has raised the market's hopes about ECB expectations, but the European Central Bank has disappointed the markets before - the latest time was just in December. We will see what they do in the coming days.

But for now, markets are cheering and oil prices are up, and that has helped calm investors' nerves to some extent. The Fed, which starts its own two-day meeting next Tuesday, has a tough job on its hands. They wouldn't like to be seen changing their tune to in response to market volatility, but they can't totally ignore the issue either. Nobody expected them to announce another rate hike so soon after the December lift-off, but it will be interesting to see how they change their language in response to recent developments.

Also on deck next week is the first look on Q4 GDP and a flood of earnings reports. The Q4 earnings season really ramps up next week with almost a quarter of the S&P 500 index members reporting results, which will give us a clear picture of the state of corporate profits. But we haven't seen any major surprises, positive or negative, from the results we have seen already. The growth challenges that been ever present in other recent reporting cycles are still with us, with companies struggling to achieve revenue growth in a slowing global economy, strong U.S. dollar and problems in the Energy sector.

The net result is that Q4 earnings for the S&P 500 index are on track to be below the year-earlier level - the third quarter in a row of negative earnings growth for the index. Recent weakness in oil and other commodity prices has effectively guaranteed that the negative growth trend will continue into the current and following periods as well. In fact, all of the earnings growth for the S&P 500 index in 2016 are now entirely expected to come in the back half of the year, with growth in the first half of the year now expected to be in the negative.

Including this morning's reports from General Electric (GE), Legg Mason (LM), SunTrust Bank (STI) and others, we now have results from 72 S&P 500 members that combined account for 19.4% of the index's total market capitalization. Total earnings for these companies are up +1.4% from the same period last year on +0.8% higher revenues, with 70.8% beating EPS estimates and only 37.5% coming ahead of revenue estimates. Other than the earnings beat ratio that is about in-line with other recent periods, this is weak performance from this group of 72 index members than we have seen in either 2015 Q3 or the 4-quarter average.

Looking at Q4 as a whole, combining the actual results from the 72 companies that have reported results with estimates for the still-to-come 428 index members, total earnings are expected to be down -6.6% on -4.6% lower revenues - the third quarter in a row of earnings declines for the index. Excluding the Energy sector drag, the Q4 growth pace would still be modestly in the negative; earnings growth for the index was in positive territory on an ex-Energy basis. Overall, earnings growth is expected to be negative for 13 of the 16 Zacks sectors in Q4.

Estimates for 2016 Q1 have started to come down lately, with total earnings for the S&P 500 index now expected to be down -3.9% from the same period last year, which is down from roughly flat growth for the period a few weeks back. All in all, this is a fairly unsettling earnings backdrop for stocks.

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.