by Shawn Narancich, CFA
Vice President of Research
Black Friday
After struggling to advance for most the week, stocks succumbed to the distinctly poor tenor of third quarter earnings. Friday’s losses erased most of the week’s gains on the 25th anniversary of Black Monday, the day when stocks crashed by 22 percent in 1987. Reporting season is now the focal point of investors’ attention, and despite some rumination in the investment community that third quarter numbers wouldn’t matter as much because of QE3 et al, today’s pullback helped dispel the notion. Despite predictable gains on Friday, benchmark 10-year Treasuries lost ground for the week.
Been There, Seen That
One-quarter of the S&P 500 has now reported earnings, and although a majority of the headline earnings numbers has exceeded estimates, the revenue line of corporate America’s income statement has so far come up short. Much like what investors saw in the second quarter, more than half of all companies are reporting revenue shortfalls, headlined by such blue-chip names as Microsoft, IBM, Coca-Cola, McDonalds and General Electric. Results are emblematic of a slow growth economy where nominal GDP is growing by low-single digit rates and sales are dampened by a stronger dollar that has hindered the translation of sales earned overseas. A weaker dollar since late July presents fewer headwinds going forward, but a slow-growth economy burdened by uncertain elections and the fiscal cliff have prevented all but a few companies from projecting any sort of earnings outlook for next year. Industrial conglomerate and Dow member Honeywell was one such exception, confirming investors’ expectations for earnings to grow by double-digit rates in 2013. Far more common this week were results from industrial brethren Dover, Danaher, Parker Hannifin and Stanley Black & Decker—all of which missed numbers and guided 2012 numbers lower.
Meanwhile, the tech sector was a mess. Humanitarians among us may be glad to know that Google CEO Larry Page has regained his voice, but investors were left speechless by the company’s results. Announced prematurely before the close of trading yesterday, Google’s quarterly sales and earnings missed by a mile. It took market makers hours to rebalance their order books heavily skewed to the sell side, but when the stock finally reopened, about $24 billion of stock market capitalization disappeared. Ghosts of earnings-troubles-past cropped up, notably the increasingly difficult challenge of squeezing ads on to mobile phone screens while getting paid rates comparable to those earned on PC screens. While mobile devices have increasingly captured the eyeballs of users worldwide, advertisers appear less willing to pay for them … which brings us to Facebook. While the stock held up relatively well following the news out of Google, we can’t help but wonder whether their earnings next week will suffer the same fate. Investors will recall that Facebook cited similar challenges when they announced lackluster second quarter results in July.
Whistling Past the Graveyard?
We would be remiss to neglect mention of economic reports this week that suggested once again that green shoots could be sprouting in the wake of easy monetary policy worldwide. Domestic housing starts reported at four-year highs and a third consecutive month of U.S. retail sales expansion should give heart to the bulls, since consumer spending remains the largest part of the U.S. economy. Indeed, the consumer seems to be more optimistic these days, but if stop-gap legislation isn’t enacted to forestall the fiscal cliff, they could be in for a rude awakening come January 1.
Next week promises to be the busiest of the third quarter reporting season, with investors challenged to digest earnings reports numbering into the hundreds daily. In addition to Facebook, such blue-chip names as Apple, AT&T, DuPont and Merck are due to confess their numbers.
Our Takeaways from the Week
- Earnings season is off to a decidedly poor start
- Stocks could be vulnerable to further profit taking if earnings reports continue to disappoint