Taking the Pulse of Earnings Season

This article was originally published by Zacks.com.

There is a lot going on this big day for data, ranging from a flood of third-quarter earnings to a reassuring-enough Chinese gross domestic product (GDP) report and a U.S. Jobless Claims report that reverses all of the gains from the previous week. It gets hard at times to make sense of it all in real time, but the bottom-line is that the deceleration in China’s growth appears to have bottomed, limiting the odds of a hard landing in that economy.

With respect to the ongoing third-quarter earnings season, the overall picture emerging is far less inspiring — even as this morning’s reports from Verizon, Morgan Stanley and Travelers all came in better than expected. With more than a quarter of the aggregate third-quarter earnings for the S&P 500 already known (from the 93 companies that have released results as of Thursday morning), we have enough of a sample size to draw some preliminary conclusions.

Revenue gains are hard to come by and far fewer companies are able to beat revenue expectations. In fact, the proportion of companies beating earnings expectations is also running at a pace that is below what these same companies achieved in the second quarter. Importantly, the overall tone of company guidance is on the weak side, increasing the odds that estimates for the fourth quarter and beyond will come down in the coming days.

Here is the real-time scorecard for the reporting season as of this morning (Thursday, Oct. 18): We have reports from 93 S&P 500 companies or 18.6% of the index’s total membership. But earnings from these 93 companies account for 27.2% of total S&P 500 third-quarter earnings. Total earnings are down 0.5% for these 93 companies, with 58.1% of the companies beating earnings expectations.

On the revenue side, total revenues are up 0.5%, with only 32.5% of the companies beating revenue expectations. This compares to beat ratios of 68.8% on the earnings side and 39.8% for the same companies in the second quarter. Outside of the finance sector total earnings are down 0.4% versus a gain of 1.5% for the same ex-finance group in the second quarter. For the 407 companies still to report results in the third quarter, total earnings are expected to be down 2.9% from the same period last year (and down 8% excluding finance).

The key earnings reports today are from Google and Microsoft after the close. Google shares have had strong momentum lately, likely indicating investors’ optimism about the company’s ability to monetize its growing mobile Android franchise. The Zacks ESP or 'Earnings Surprise Prediction' or proprietary leading indicator of earnings surprises, is showing Google coming short of earnings expectations today. With respect to Microsoft, the issue is not its third-quarter results, but the outlook for its upcoming Windows 8 operating system and its bet on the tablet market through its Surface offering.

Some of the comments on the Intel conference call did not inspire much confidence about the demand outlook for Windows 8, but we will know more in the coming days. These company-specific questions aside, it will be interesting to see whether these two companies can buck the trend of coming short of revenue expectations.

China’s third-quarter GDP growth came in broadly in-line with expectations at 7.4%, below the second quarter’s 7.6% pace. This is the weakest quarterly growth rate since early 2009 and the seventh consecutive quarter of decelerating growth. China’s small domestic consumption has been unable to offset the weak export demand and lower domestic investment spending in recent quarters. The decelerating GDP growth trend in today’s third-quarter GDP report notwithstanding, other recent data appears to be showing that a bottoming process may have already gotten underway.

The September data for industrial production, exports, retail sales and even inflation show noticeable improvement from the preceding month’s trend. What this means is that the decelerating GDP growth trend line of recent quarters may have already run its course, which will most likely show up in the fourth-quarter GDP report. On the flip side, this means that the new leadership team taking over early next month may not need to come out with a major stimulus program as many in the market appear to be holding out for.

Sheraz Mian is the Director of Research at Zacks Investment Research where he relies on valuable data to assess winning stocks and funds.

The information supplied above by Zacks Investment Research Inc. contains opinions based on factual research which may or may not be accurate. Neither Zacks nor Intellisphere will assume any liability for losses from investment decisions based on this information.