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Tickers in this Article: PG, UPS, BA, AMZN, MSFT, ETN
Friday, October 25, 2013

Follow through from last evening’s strong Amazon (
AMZN) and Microsoft (MSFT) reports and a mixed-bag Durable Goods report provide the backdrop for the stock market today.

The Durable Goods orders report for September came in better than expected on the ‘headline’, but the report’s internals point to softening trends in business capital spending ahead of the government shutdown. The ‘headline beat was primarily a function of strong orders for Boeing’s (
BA) commercial aircraft, which we knew already from the company’s strong Q3 earnings report. Business spending has been underwhelming in recent quarters and likely weakened some more as a result of the shutdown.

On the earnings front, we are now past the halfway mark, with results from more than half of the market capitalization of the S&P 500 index already out. After a shaky start, the Q3 earnings season has been steadily improving in recent days. Guidance still remains on the weak side, prompting estimates for Q4 to come down. But the scorecard for Q3 has bloomed lately, with growth rates and beat ratios that were earlier tracking below the last few quarters now outpacing them. A big driver of Q3’s recent sprint relative to the last few quarters is the momentum in the Technology sector.

The Microsoft report is a good example of the sector’s improving picture. The company’s beat was driven by strong sales to businesses, an area that has been under pressure in recent quarters as a result of restrained capital spending by businesses, as this morning’s September Durable Goods orders report reconfirmed. But the company’s Q3 report shows that not only its legacy enterprise business remains strong, but that it can leverage its Windows and Office foothold to sell other related services like Cloud.

Including this morning’s reports from Proctor & Gamble (
PG), Eaton Corp (ETN), UPS (UPS) and many others, we now have Q3 results from 243 S&P 500 members that combined account for account for 54.7% of the index’s total membership. Total earnings for these 243 companies are up +8.1%, with 67.9% coming ahead of consensus earnings expectations. Total revenues are up +3.4% and 49% are beating top-line expectations.

This is better performance than what this same group of companies reported in Q2 and what on average they reported in the preceding quarters. A major contributor to the improved picture relative to the last few quarters is the Technology sector where earnings and revenue growth is tracking materially higher. The composite earnings and revenue growth rates for Q3, combining the results for the 243 companies that have reported with the 257 still to come, are +3,2% and +1.3%, respectively. This means that Q3 is on track to be along the lines of what we saw in the last few quarters, likely a little better.

Expectations for 2013 Q4 have started coming down, but they still represent a material ramp up in the growth pace, with total earning for the S&P 500 expected to be up +8.9%, down from +9.1% yesterday and higher than +10% at the start of the reporting season.

Sheraz Mian
Director of Research


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