MorningWord 11/6/13: “One dog goes one way, the other dog goes the other way, and this guy’s sayin’, Whadda ya want from me?” $SPX, $FEZ

by Dan November 6, 2013 9:07 am • Commentary

MorningWord 11/6/13:  With more than three quarters of the S&P500 components having reported, I think it is fairly safe to say that the results (despite the repeated lowered estimates over the course of the year) have not been as bad as most skeptics would have expected.  Per FactSet’s Earnings Insight piece from this past Friday:

-Earnings Scorecard: Of the 366 companies that have reported earnings to date for Q3 2013, 74% have reported earnings above the mean estimate and 53% have reported sales above the mean estimate.

-Earnings Growth: The blended earnings growth rate for Q3 2013 is 3.0%. The Consumer Discretionary has the highest earnings growth rate for the quarter, while the Energy sector has the lowest earnings growth rate for the quarter.

-Earnings Revisions: On September 30, the earnings growth rate for Q3 2013 was also 3.0%. Eight sectors have recorded increases in earnings growth rates over this time frame, and two sectors have recorded declines in earnings growth rates over this time frame.

-Earnings Guidance: For Q4 2013, 66 companies have issued negative EPS guidance and 13 companies have issued positive EPS guidance.

-Valuation: The current 12-month forward P/E ratio is 14.8. This P/E ratio is based on Thursday’s closing price of 1756.54 and forward 12-month EPS estimate of $119.05.

Yesterday on CNBC’s Fast Money Halftime the panel banged around the bull / bear debate for the current rally  in equity markets.  Obviously the usual suspects were discussed, like taper, or no taper because of the continued slow pace of the economic recovery.  This came on a day where the EU lowered their growth forecasts for the Eurozone for 2014, while also raising their unemployment forecast for the same period.  My only point on the matter is that if the EU is accurate in their assessment that growth across the region in 2014 will be a shade above 1%, then many U.S. multinationals who will rely on global demand for their next leg of growth could be a tad ahead of themselves.  This is obviously a big if, and maybe it simply sets expectations very low.

The markets don’t seem too concerned about another year of low growth, though, particularly for the Eurozone.  European stocks have significantly outperformed U.S. stocks in the past 6 months as the valuation discount among European large cap stocks has attracted fund flows away from other equity markets globally.  In other words, large global investors are of the opinion that European stocks had more than discounted continued weak growth earlier this year.

Weak growth has not been the issue for financial markets for many years now.  The real flare-ups in markets have occurred when either fears of negative growth (mid-2010, mid-2012) have become widespread; or fears of faster-than-expected growth, and hence monetary tightening (spring 2011, summer 2013), have become more entrenched.  In that sense, markets are hoping for a not-too-hot / not-too-cold jobs report on Friday.  For much of 2013, that’s been the prescription for this monster rally.