What Goes Down Will Come Up – Over Time

By David B. Armstrong, CFA | Jul 28, 2014 | Weekly Market Commentary

Along with the Costa Concordia, the market floated along last week.  675 companies have now reported their quarterly earnings for this season and about 500 of them reported last week.  30% of the companies reporting last week were components of the S&P 500, so things got pretty busy… and the markets took note with the Dow Jones Industrial Average (DJIA) losing some ground.  More details are inside along with a preview of all of the upcoming economic news.

I wrote a blog a short while back that was about corrections – if you missed it you can read it here.  It was not one of my weekly recaps so check it out when you get a chance.

So while the Dow Jones Industrial Average was down last week, the S&P 500 was basically dead flat.  Earnings reports from both Amazon and Visa on Friday caused a sell-off that accounted for the damage in the DJIA.  Here are the weekly charts for the week.

Earnings

We follow Bespoke Investment Group for earnings research.  As we stated above, 675 companies have reported their earnings and revenue for the second quarter (2Q) of 2014.

Here’s where we stand:

• The percentage of companies beating their revenue estimates for the 2Q currently sits at 62.3%. This number is nicely above the average of 60% we’ve seen since 2001 and above the 56.0% that finished up the 1Q of 2014.  Of course, the earnings reports are not close to being complete but that sure would be a big move down from the current reading of 62.3% to the 56% final reading we saw in the 1Q.

• The percentage of companies beating their earnings estimates stands at 60%, which is well above the 56.7% final reading from the 1Q of 2014.

Bespoke also publishes a chart that shows the spread between companies guiding future earnings higher or lower on a percentage basis.  Up until the 1Q of 2014, the spread had been negative for the TEN previous quarters, meaning there are more companies stating they will earn less in the upcoming quarter than the same quarter a year prior. That’s 2.5 years of pessimism coming out of corporate America.

BUT, that 10-quarter run came to an end in the 1Q and as of Friday, the spread between companies posting negative guidance vs. companies posting positive guidance stands at -0.03% so it’s basically flat. That means, depending on the next few weeks, it is possible we could see this reading turn positive for the second quarter out of the last twelve quarters.

This week we will see reports from big names like Pfizer, Exxon Mobil, American Express, Time Warner, and Colgate-Palmolive.

Big Economic Report This Week

On tap this week we have the jobs report, July auto sales, the 2Q U.S. GDP growth report (initial estimate) and a ton of global and U.S. manufacturing reports.

There will be a lot of eyes on the GDP report this week.  It will be the first release of the reading for the 2Q of 2014.  The reason it will be so closely watched is because the 1Q was a negative -2.9% reading and surprised a lot of folks.  Here’s a chart from whitehouse.gov.

Of note is that with a negative GDP reading of almost -3%, the market has still held up…so that means most people think it is a one-time bad reading due to the really cold winter AND there are estimates that the 2Q GDP report will come in around 3%.  In fact, of the 66 economists surveyed by Bloomberg, the range was between 2.3% and 5.2% for 2Q GDP.  The most common reason I’ve seen justifying the 2Q estimates are:

1) an improving employment picture coupled with a downturn in corporate layoffs

2) banks have really increased their lending

That report will be out Wednesday.

Friday will have ISM Manufacturing reported along with vehicle sales.

Oh, and it’s officially August on Friday.

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