Earnings season is in full swing and is really the most important factor affecting stocks. According to FactSet, with 58% of companies in the S&P 500 having reported Q3 earnings so far, 74% have exceeded their mean earnings per share estimate and 58% have reported revenues above the mean estimate. More significantly, for Q3, the blended earnings growth rate for the S&P 500 is 1.6% marking the first time the index has seen year over year growth in earnings since Q1 2015. This is also significant because on September 30, the expected blended earnings growth rate was -2.2% which means it appears earnings season is coming in better than expected just one month ago.
Take a look at the chart below from FactSet
Why are earnings improving? Energy has been a positive surprise…
Looking forward on earnings, we now have just a very slight increase from 2014 and 2015 and higher expectations for 2017. Stocks typically follow earnings, eventually.
Another reason earnings are starting to look up, is that our economy continues to chug along, with no sign of recession. Below is a graphic of leading economic indicators (blue) and coindident economic indicators (red). A downturn here would signal a recession as you can see from the ‘99-00 and '07-08 timeframes. Recessions tend to be tied to a falling stock market.
One of the down sides of an improving earnings and economic picture is the odds of a Fed rate hike at the December meeting are near 70% as you can see below from the CME Fed Watch tool.
We are now just 8 days away from the Presidential election, which has created a lot of uncertainty for markets. Despite improving earnings and economic conditions, markets continue to exhibit weakness going into the election. The market has been stuck in a narrow trading range since the spring.
Here we see recent performance for common stock indexes:
Bonds have also been weak on expectations of rising interest rates. When interest rates rise, bond prices typically fall.
Having the election behind us will remove one of the big uncertainties for stocks. Once again, we watch, wait, and focus on long-term objectives.
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