Waiting for the Skies to Clear - Ahead of Wall Street

By Zacks | February 27, 2014 AAA

Thursday, February 27, 2014

To say that this winter has been problematic will be understatement. While it has caused all kinds of problems for regular folks in their day to day activities, it has robbed us of the ability to evaluate the health of the economy through these regular economic releases. It’s been hard, if not altogether impossible, to get a good sense of developments in the economy due to weather related distortions.

This morning’s data is no different, with both the Durable Goods orders and Jobless Claims numbers presenting a mixed picture. This follows soft readings on the housing, factory, and consumer sectors in recent weeks. But the hope remains that the economy’s fundamentals remain strong and growth will resume once the skies clear up.

The problem is that we wouldn’t get ‘clean’ data at least for another month as next week’s manufacturing ISM, consumer spending, and labor market (non-farm payrolls & ADP) will continue to show weather centric distortions. It will be interesting if the Fed’s new Chairwoman will give us her take on what’s going on with recent data in her testimony this afternoon.

On the earnings front, including this morning’s reports Best Buy (BBY), Sears Holding (SHLD), and Kohl’s (KSS) and others, we now have Q4 results from 474 S&P 500 members. Total earnings for these companies are up +9.6% from the same period last year, with 67.5% coming ahead of consensus EPS estimates. Total revenues are up only +0.8% and 60% have beat revenue expectations. Revenue weakness has been a recurring theme in recent quarters and Q4 is no different, though the unusually low growth pace thus far is mostly due to the Finance and Energy sectors, particularly one-off tough comps for Prudential Financial (PRU).

The Q4 earnings season has overall been not that bad, with earnings growth rate the highest in 2013, total earnings on track to reach a new all-time quarterly record, and companies beating estimates at an above-average rate. But they continue to guide lower, prompting estimates for the current quarter to come down. Total earnings for 2014 Q1 are now expected to decline by -3%, down from estimates of +2.1% at the start of the Q4 reporting season. This trend of downbeat of guidance and resultant negative estimate revisions has been a recurring theme with us for more than a year.

But investors have hardly missed a beat during this time period, pushing stocks into the record territory. Perhaps investors are hoping that the earnings picture will get better as underlying economy thaws after the winter.

Sheraz Mian
Director of Research

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