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Dubious Earnings Coupled With a So-So Week

Back-Seat

The news of the European economy took a back seat to the 2nd quarter earnings releases this past week.  There was a lot of cautious talk in the announcements but for the most part, the companies that have announced have done ok (barely) relative to the reduced expectations.  The equity markets had a modest week – mostly as a sign of relief rather than a sign of jubilation.

Here’s how the market ended up for the week.

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Out of the 120 of the Standard & Poor’s 500 (S&P 500) companies that had reported earnings through last Thursday, 68% have topped analysts’ profit forecasts.  68% is ahead of the historical average of about 62%.  However, in the 1Q of this year, that percentage was at 80%.  Revenues are coming in a little soft with only 45% of the 120 companies beating the forecasts.  The historical average is 56%.

There are two big factors helping companies beat earnings forecasts.  First, the weak economy has forced many companies to reduce their profit forecasts.  Thus, the bar becomes easy to clear when it’s sitting on the ground.  Second, companies have done a good job managing expectations and to some extent can still manage expenses.

But – it’s harder to fine-tune revenues which are dependent on the economy. Revenue is the top line number and companies are either selling goods or services to consumers or they are not.  Given that only 45% of firms who have reported have beaten their revenue expectations, we are hearing a lot of companies announce that their revenue results are a reflection of the economic slowdown and the challenging environment.

The Week Ahead

About one-third of the S&P 500 companies are set to report this week, so there will be a lot of information to digest but it will ultimately give us a much better feel for how the major U.S. corporations are weathering the sluggish and uncertain economic environment.

Also this week, while the economic data will be overshadowed by earnings, there are some important reports coming out including a preliminary look at the Q2 Gross Domestic Product (GDP). Analysts per Bloomberg expect growth to slow from Q1’s annualized rate of 1.9% to just 1.2%.

Finally, the Bureau of Economic Analysis (BEA) will provide quarterly revisions going back to 2009. Last year, the BEA’s revisions revealed that the recent recession was deeper and the recovery was shallower than previously thought.

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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Stock investing involves risk including loss of principal. The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries, and widely held by individuals and institutional investors. The Standard & Poor’s 500 Stock Index (S&P 500) is an unmanaged capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The NASDAQ Composite Index measures all domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index. The Russell 2000 Small Stock Index is an unmanaged index generally representative of the 2000 smallest companies in the Russell 3000 Index. The Russell 2000 is an unmanaged index generally comprised of companies with lower price-to-book ratios and lower forecasted growth values.  The 2, 10 and 30 year Treasury is simply the yield at the close of the day.

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David B. Armstrong, CFA

President & Co-Founder

Dave got into the industry when he discovered his passion for finance in his mid-20’s. He’s a combat veteran and served as an officer in the United States Marines Corps on both active duty and in the reserves, retiring at the rank of Lieutenant Colonel. While serving on active duty, Dave was unable to spend money on deployments, so he became a self-taught investor. Along with a few bucks cash as a bouncer, his investing performance grew to be good....

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