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U.S. markets seem to be suffering from a post-New Year’s hangover after celebrating a banner 2013.
Stocks have fallen each of the first three trading days to start 2014. It’s the first time they’ve done that in a month. At this point, Wall Street could use a jolt to get out of its early-year funk.
Perhaps Q4 earnings season will be that jolt.
Corporate earnings have been a boon for U.S. stocks of late. Last year, the S&P 500 rose an average of 3.5% during the first three weeks of each earnings season. Added together, that accounts for nearly half the index’s 29% 2013 return in a matter of just 12 weeks.
More companies exceeded earnings expectations than usual last quarter. Seventy-three percent of S&P 500 companies beat earnings estimates in the third quarter – ahead of the 70% average beat rate of the previous four quarters. Eight of the 10 sectors reported higher earnings than they did in the third quarter of 2012.
The strong Q3 growth and better-than-average beat rate resulted in a 6% boost in share prices over the month that most of the major companies were reporting.
However, the 70% beat rate in the previous four quarters was below the four-year average of 73%. Despite the mediocre results, stocks still advanced in each of the last four earnings seasons. That speaks to the appetite investors have for buying stocks these days. Even modest earnings results are enough to jumpstart the market.
Will that be the case again this earnings season?
Black Friday sales weren’t a very promising bellwether.
Consumers spent 3% less than they did in 2012. That was a rarity considering Black Friday spending had risen an average of 15% in the previous two years. On the flip side, Cyber Monday sales were better than ever – perhaps a sign that more consumers are simply shunning brick-and-mortar Black Friday shopping in favor of buying clothes and electronics from the comfort of their homes.
Plus, retail sales are only one slice of the fourth-quarter pie. Overall, Q4 earnings are expected to grow 6.3% from a year ago, with financials leading the way at 24%.
The bad news is that of the 107 S&P 500 companies that have issued fourth-quarter guidance, 94 of them were negative. That’s an 88% negative guidance rate, well ahead of the five-year average of 64%.
So there are reasons for investors to be concerned about a potentially underwhelming earnings season. Given the impact corporate earnings have had on Wall Street over the past year-plus, however, it seems that even an average earnings season might be enough to sustain this market.
Nothing has been able to keep stocks down of late. Even supposedly destructive events such as the beginning of Fed tapering, the government shutdown, and sequestration did little to deter investors from buying stocks. Modest earnings haven’t scared them away either.
As long as Q4 earnings aren’t a total disaster, they should help awaken U.S. stocks from their New Year’s slumber. Until proven otherwise, it would be foolish to bet against this market . . . especially during earnings season.
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