Monday, 8 October 2012

Message for US Congress but with earnings doing the talking

12 months' forward earnings growth for the S&P 500
At least three things can be said about the third quarter US earnings season which gets underway in earnest next week, but this is after Alcoa’s results tomorrow, followed by half a dozen companies reporting over the coming days - including a few of the big banks on Friday.

First, 25 companies in the S&P 500 have already reported and if their results are anything to go by, then this quarter’s earnings news flow will be disappointing. A little more than half of the 25 have beaten expectations for both revenues and earnings, but for both the beats-to-misses ratios are poor. This unpromising start is consistent with the guidance ahead of the results season which showed the weakest ratio of negative to positive preannouncements since the days of the dot com bust.

Second, the loss of earnings momentum should not really come as too much of a surprise. It fits with and reflects the loss of momentum throughout the global economy. What should be of interest is the ‘look ahead’ that companies offer on the back of their results considering the prevailing uncertainties that are responsible for the loss of economic momentum in the first place.

Third, there is a message for Congress. If there is a recession out there, it won’t be the Fed that gets the blame. As the last set of FOMC Minutes showed, US fiscal policy is chief among the concerns expressed by companies. A poor earnings season will only create more angst at a time when the uncertainty over how the fiscal cliff is to be addressed is leaving companies ‘particularly cautious’ and likely ‘to remain reluctant to hire or expand capacity.’

Mr. Bernanke has tried to impress on Congress the limitations of monetary policy, particularly in the event of a fiscal shock. Congress has also had the benefit of knowing how Richard Fisher, President of the Federal Reserve Bank of Dallas, feels about its efforts. As the forthright Mr Fisher put it, the fiscal authorities ‘... fight, bicker and do nothing but sail about aimlessly, debauching the nation’s income statement ...’ and so on. Hopefully, Congress has been listening, but maybe earnings will do the talking too. It will have to be this quarter’s earnings though that does the talking. Next quarter’s may be too late!

Let’s not write off the earnings season before it really gets started. However, if it is poor and equity markets react, some good may still come of it. If it spurs Congress into action, some of the uncertainty hindering investment intentions and job growth might lift and demand might then be more responsive to the stimulus already provided by Fed policy. Now that would get reflation going, to say nothing of the boon for equity markets.  

Mike Lenhoff
Chief Strategist

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