What’s On Tap?
October 26, 2015
As was anticipated, corporate earnings took center stage and have provided some much needed relief for equity investors. Although earnings are not stellar, they have proven not as dire as market participants seemingly anticipated According to FactSet Data Research, of the 177 companies reporting through October 23rd, 77% have reported earnings above the mean estimate and 43% have reported sales above the mean estimate. Corporations continue to manage the bottom line very well by containing costs and improving productivity. This is evidenced in the fact that less than 50% have beat top line sales estimates but 77% have beat on the bottom line. Corporate America is managing the environment well but the lack of top line growth continues to be a primary concern to equity investors moving forward.
The trifecta of Microsoft, Alphabet (formerly Google), and Amazon towards the end of last week allowed the market to continue its earnings relief rally. Clearly these tech bellwethers flexed their operating muscle and continue to show that growth can be had. However, this difficult global business environment is separating the wheat from the chaff and should allow active investment managers to add value. On Tap this week is the fourth bellwether and perhaps the most important to the market, Apple. Apple is set to announce its quarterly results on 10/27 after the market close. Investors will anxiously await these results to see if Apple can deliver growth on the heels of the IPhone 6 rollout and continued IWatch adoption. Growth becomes more challenging for a company this size but the stock may have already priced in this natural growth slowdown as the stock continues to trade at a large discount to its leading tech brethren noted above. A large number of the S&P 500 Index constituents remain to report this week and we are hopeful for continued solid results.
We Love Liquidity
In addition to the earnings relief that equity investors has received, the global economy found additional relief in additional stimulus from China in the former of lower interest rates and reserve requirements. On Friday, 10/22 the People’s Bank of China (PBOC) lowered its benchmark interest rate by 25 basis points and also cut the reserve requirement ratio (RRR) by 50 basis points. These efforts are expected to release an additional $100 Billion into the Chinese economy and this is the sixth time since November that China has sought to stimulate its economy. At the same time, ECB President Draghi recently was more dovish at its recent board meeting in his comments and pointed towards a potential easing at its next meeting in December. These collective stimulus efforts combined with solid U.S. corporate earnings have brought this recent rally to fruition.
A significant amount of S&P earnings are on Tap this week including the aforementioned Apple. The global growth efforts are very important to the future direction of the equity markets as top line growth has been challenged and future earnings growth may suffer if the top line cannot pull through. Below is a chart of earnings growth expectations for 2016 by industry sector and the broad S&P 500 Index. Expectations for growth are still strong with 2016 expected EPS growth of 8.69% on the S&P 500 but they have come down from the 9/30 estimates of 10.0%. Top line growth will need to resume to stem further EPS estimate declines.
Stay thirsty fellow investors!
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