Earnings Season 3Q14 – Wrap it Up!

S&P500 index – Surprises versus Expectations

To put an end to Earnings Season 3Q14 – Wrap it Up!

  • 93% of the stocks in the S&P 500 having reported earnings for 3Q14, it’s time to put a cork in it.
  • According to actual earnings versus consensus earnings 73.5% reported higher actual earnings with surprises on average 4.9% over consensus.
  • 59.2% of companies reported lower revenues than consensus expectations, with the difference of .3% on average.  Click here to read Yardeni and Factset’s latest reports.

 S&P 500 Sectors – a more granular look at surprises

On the Earnings sude , Energy, Materials and Financial Services had the largest positive surprises

  • Energy companies reported earnings 9.4% over consensus earnings on average;
  • Materials announced 8.5%;
  • Financial announced 7.4%.
  • The Entire Index reported positive earnings surprises of 4.4%.

On the revenue side, the same three sectors announced revenue 1% lower than consensus;

  • Materials announced positive surprises on the revenue side of +.5%
  • while financials announced positive surprises of 1.4% on average.
  • This compares to the entire index reporting .3% higher revenues than consensus expectations.

Guidance for 4Q14

  • 74 Companies announced negative guidance for 4Q14;
  • only 19 companies issued positive guidance.
  • AS you can imagine, those companies which reported much higher earnings this quarter have provided the most conservative guidance for 4Q14.
  • To the cynic guidance numbers give these sectors leeway to breathe and not dissapoint shareholders should performance weaken this quarter.

Considerations:

-EXHAUSTION/DIVERGENCE OF BROADER BASED INDICES:

Broader based indices (Wilshire 5000) are showing divergence in returns from one year ago.  While the Micro-Cap index shows almost zero return this year, the total market index continues to make new highs.   This divergence generally points to long term exhaustion in a market.  Without momentum on rates (higher) it’s tough to  bring this exhaustion indicator center stage at the moment.

– MONETARY POLICY

Anytime monetary policy is on the verge of a sea change, corporate earnings will be much more difficult for the analysts to estimate.   Also, monetary policy is changing without the economy completely turning the corner and showing strength.  It’s like turning a steamship in a bath tub.  I do love that allusion.

– INTEREST RATES

When rates are raised because the Fed doesn’t want the economy heating up and becoming inflationary the impact on earnings are very different than that situation in which we find ourselves.

Today, we do not have a strong economy.  We have very tepid and inconsistent growth.  We will need to take care to watch economic reports and compare them to changes in the LIBOR forward curve.

Today the Eurodollar futures show 3 month libor forward rates staying below 1% for another 16 months and below 2% for another 28 months.  Hoping cheap money will jump start the economy butnot seeing any specific area of the econoic to which we can hold onto and endorse as a population.

See Chart 1 below, 3 month LIBOR forward curve shows 3 Month LIBOR rates under 1% for the next 16 months and  3 month LIBOR forward curve shows 3 Month LIBOR rates under 2% for the next 28 months.

Chart 1. current 3 month libor forward curve

Earnings Season - 3Q14 3ML FWD

Source: www.cmegroup.com

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