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Tickers in this Article: CMI, TWX, DIS
Wednesday, February 6, 2013

Stocks appear determined to keep pushing higher, though the lack of any material news today and the coming days will likely slow the process down. Confidence remains high despite domestic budget uncertainties and renewed questions about Europe. But while the near-term momentum remains to the upside, it is far from clear if the trend can sustained longer term.

Europe has raised its head in recent days after laying low for quite a while. The calm and stability engineered by Mario Draghi, the head of the European Central Bank (ECB), appears to be under threat from unsettling political developments in Spain and Italy. Corruption allegations against the Spanish government undermine its ability to implement tough austerity measures when more than a quarter of the workforce is unemployed. The political situation in Italy is no less uncertain given the growing popularity of the discredited Silvio Berlusconi party in the upcoming elections. The ECB's monetary tools may not be of much use if doesn't have credible political partners in these countries. There is no imminent threat of a full-blow resumption of what the markets endured in the last two years, but the European scene is steadily becoming noisier.

On the earnings front, we got positive results from Cummins (CMI) and Time Warner (TWX) this morning and Disney (DIS) after the close on Tuesday, continuing the parade of 'good enough' Q4 earnings reports. As of this morning, we have earnings results from 299 S&P 500 companies, with 66.6% of companies beating earnings expectations and 63.5% coming ahead of revenue expectations. The 'beat ratio' on the earnings front is better than the third quarter, but roughly in-line with historical averages. The notable improvement is on the revenue side, with a bigger percentage of companies relative to the last few quarters coming ahead of expectations.

The revenue outperformance is largely a function of subdued expectations as there is almost no accompanying growth. Total earnings and revenues for the 299 companies that have reported already (accounting for roughly 72% of index's total market cap) are up +2.8% and +0.5%, respectively. The composite earnings and revenue growth rates for the fourth quarter, where we combine the actual results for the 299 with estimates for the remaining 201 companies, are +1.6% and +0.5%, respectively. This is better than the third quarter, but nevertheless the second lowest growth pace since the earnings recovery got underway in 2009.

The market doesn't seem to be overly concerned about the lack of growth as it is looking ahead to the expected resumption of growth in the second half of the year. Earnings growth in 2013 and 2014, which mirrors estimates for economic growth, are expected to show a material ramp up. The relatively less worrisome tone of company guidance on the Q4 earnings calls and the recent turn of favorable economic data have raised in confidence in those expectations. This has been at play, to some extent, in the market's positive momentum.

Sheraz Mian
Director of Research
 
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