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Tickers in this Article: YUM, DIS, GM, KORS, TWTR
Monday, February 3, 2014

Stocks were broadly down in January, with a combination of emerging market scare and a lackluster earnings season giving investors a reality check that markets don’t always go up as had been the case last year.

This week’s top-tier economic data – the ISM survey later today and Friday’s January jobs report – will likely do little to change the mood in any sustained fashion as long as the emerging market question remains unanswered. For stock market investors, the issue is mostly psychological at this stage.

But if the problem persists longer than a few more weeks, then it has the potential to become a direct headwind for stocks through damage to the growth outlook for these countries. It’s a bit quiet today on the emerging market front, but the issue is still unresolved.

We don’t have much on the earnings front this morning, with Yum Brands (YUM) as the notable report after the close today. But the rest of this week will bring in results from a host of bellwethers like Disney (DIS), General Motors (GM) and Kellogg (K) and new high-flyers like Michael Kors (KORS) and Twitter (TWTR).

We are past the half-way mark in the Q4 reporting cycle already, with results from 251 S&P 500 members out as of Friday. Total earnings for these companies are up +11.4% from the same period last year, with 70.1% coming ahead of consensus EPS estimates. Total revenues are up +1.6% and 59.4% have beat revenue expectations.

The market hasn’t shown much enthusiasm for the Q4 earnings reports, through overall results have been no worse than what we have been seeing over the last few quarters. In fact, this earnings season has been better than recent quarters in terms of earnings growth and positive earnings surprises.

The disappointing part has been on the guidance front. But even there, the issue is more lack of any improvement than any new evidence of weakness. ??????It appears that investors were looking for something better, particularly on the guidance front. The hope was that given the improving domestic economic scene and signs of stabilization in Europe, we will get relatively reassuring guidance from management teams.

But we are not seeing that, with managements continuing to provide sub-par outlooks for the coming quarters, causing estimates to keep coming down. The ongoing emerging market turmoil, if it persists long enough, has the potential to further accelerate this negative trend.

Sheraz Mian
Director of Research


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