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, Alcoa’s (AA) 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 Wells Fargo (WFC) 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 2014 Q1.
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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