Weekly market commentary for Oct. 21
By DAVID JOY
Second-quarter earnings were well above expectations. In fact, a record percentage of companies produced positive surprises. Most of that outperformance came as a result of cost cutting, as businesses fought to maintain their profit margins in response to weak revenue growth. Of the 10 equity market sectors, only financials enjoyed a revenue increase.
The question is how much revenue growth will we see in the third quarter and how will investors respond? For what few earnings reports we’ve seen so far, the answer seems to be that revenue gains will be rewarded, but so will bottom lines that surpass expectations even without top line growth.
According to Barclay’s, companies that have so far beaten earnings per share (EPS) estimates have enjoyed a next session gain of 2.4 percent. Those beating on revenues enjoyed a 2.7 percent gain. In contrast, companies missing EPS estimates have declined 4.5 percent and those that only matched expectations fell 3.6 percent.
It may be too early in the economic recovery to expect much by way of sales growth. But that sentiment may not last much longer. Revenues overall tend to rise a couple of quarters after earnings bottom. This suggests that as early as the fourth quarter the bar may be raised on revenue growth expectations.
Weak Dollar
One potential source of revenue gains in third-quarter results might be the weakness in the dollar. The U.S. Dollar Index (DXY) was down by more than four percent in the third quarter and by more than 10 percent during the past six months. Companies with greater overseas revenue exposure may benefit. At the sector level, technology, energy, materials and industrials derive the largest percentage of revenues from overseas.
This past week’s reports from Intel and IBM should provide some insight into the overall tech sector results, just as Alcoa’s report the week before, that evidenced firming prices and rising overseas demand, is hoped to be indicative of the experience of the broader materials group.
Financials could see revenue growth again this quarter given the normalizing trend in capital markets. Last week’s reports from Goldman Sachs, J.P. Morgan Chase and Citigroup should answer that question.
Although it is still very early in the earnings reporting season, the aggregate results have been strong with 71 percent of companies beating expectations, only slightly below record second-quarter results of 74 percent. This was foreshadowed by a strong preannouncement season and by strong upward revisions ahead of actual earnings announcements.
This Weekly Market Commentary, as written by David Joy, is provided by Paul Rendine and Jeffrey Deprisco of the Salisbury, Md., Ameriprise Financial, Inc. office at 800-759-2083, or through Jeffrey.p.deprisco@ampf.com. David Joy is the chief market strategist at Riversource Investments, a unit of Ameriprise Financial, member FINRA/SIPC.