October 26 2015 - Why Do We Care About Earnings?

October 26, 2015

Stocks rallied again last week on a strong Tech sector showing, bringing the S&P 500 positive for the year again. For the week, the S&P 500 gained 2.07%, the Dow grew 2.50%, and the NASDAQ rose 2.97%.^[1]

Every quarter, financial pages everywhere become focused on earnings reports as companies begin to dole out information on how they performed in the last quarter. So far, we've heard from 172 S&P 500 companies who have reported 2.0% higher profits on 2.1% lower revenues as compared to the same period last year. Now, higher earnings can be counted as good news, but S&P companies have gotten a boost from the Tech sector and some individual success stories. Once all reports have come in, analysts are projecting earnings to be 3.4% lower (than Q3 2014) on 5.1% lower revenues.^[2] Overall, it's clear that the same headwinds that challenged firms in the second quarter stayed with us.

Why do earnings matter? For stock investors, earnings season matters because underlying earnings influence price movements. Since stocks are just ownership shares of a company, (all things being equal) good news for the underlying firm will generally result in upward movement of the stock. Bad news is usually greeted with a drop. Now, these relationships get tricky when investors anticipate good or bad news and buy or sell a stock to speculate before earnings reports come out. That's one reason markets are often more volatile during earnings season.

For everyone else, earnings reports are a good way to get a look at the business climate for U.S. firms. Earnings reports contain a lot of information: revenues, profits, challenges, expectations about the future, and often special notes by company managers. This data is a goldmine for analysts as they create forecasts about the future.

As financial professionals, it's our job to search for the individual success stories for our clients. We are always on the lookout for opportunities and strategies to help our clients pursue success in challenging markets. If you have any questions about earnings or strategies for volatile markets, please let us know.

The week ahead is brimming with more earnings reports that should further clarify the business picture for U.S. companies. The Federal Reserve is also hosting its October Open Market Committee meeting and will announce any rate changes or other moves on Wednesday. Very few (if any) analysts expect the Fed to change interest rates at this meeting; however, investors will be interested to see if the Fed issues any guidance about whether to expect a hike in December or early next year. Has "Fed fatigue" set in?^[3] Maybe, but markets could still react to unexpected news from central bankers. The other big data release is our first look at third-quarter economic growth. We'll keep you updated.

ECONOMIC CALENDAR:

Monday: New Home Sales, Dallas Fed Mfg. Survey
Tuesday: Durable Goods Orders, S&P Case-Shiller HPI, Consumer Confidence
Wednesday: International Trade, EIA Petroleum Status Report, FOMC Meeting Announcement
Thursday: GDP, Jobless Claims, Pending Home Sales Index
Friday: Personal Income and Outlays, Employment Cost Index, Chicago PMI, Consumer Sentiment

_{Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance and Treasury.gov. International performance is represented by the MSCI EAFE Index. Corporate bond performance is represented by the DJCBP. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.}

HEADLINES:

Jobless claims edge upward. New claims for unemployment benefits rose slightly last week, although the number still remains close to historical lows. While no seasonal factors were officially reported, employers could be preparing for the holiday shopping season by hanging on to employees.^[4]

Existing home sales rise in September. Sales of existing housing stock spiked to the second-highest level since February 2007. The increase puts existing home sales 8.8% higher than September 2014, likely due to favorable mortgage rates and an improving labor market.^[5]

Housing starts soar in September. Groundbreaking on new U.S. properties rose more than expected last month on rising demand for rental apartments. While the boost in housing market activity is great news, higher rental demand may come at the cost of lower home purchases.^[6]

China's central bank cuts rates again. The People's Bank of China cut interest rates for the sixth time since last November in an effort to boost economic activity. The bank also lowered bank reserve requirements, making it easier for banks to finance loans.^[7]

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