Can the market go higher with lower earnings forecasts?

Can the market go higher with lower earnings forecasts?

Markets declined for most of the week on disappointing third quarter earnings reports, with the technology sector hardest hit. On Friday, the 25th anniversary of 1987’s stock market crash (known as Black Monday) , trading was mostly downbeat as investors digested a string of disappointing earnings reports. In spite of this, markets staged a brief comeback in the last hours of trading to close mixed. For the week, the S&P gained 0.32%, the Dow gained 0.11%, and the Nasdaq fell 1.26%.


Overall this earnings season, Q3 profits have managed to come in just a shade over the doom and gloom estimates. However, the bad news is that top line revenue is much worse than forecasted. One of the big disappointments this week was Google (GOOG), which missed its revenue forecasts for the first time because of its struggling Motorola division and drove a tech selloff on Friday. Market stalwarts GE (GE) and McDonald’s (MCD) also turned in downbeat reports, pushing shares of both companies lower. With about one-third of S&P 500 companies reporting in, a solid 65% have beaten profit estimates, while just 42% have managed to beat revenue forecasts. This repeats the performance we saw in the second quarter, which shows that companies are learning to do more with less while dealing with challenging business conditions.

Not all the earnings news is grim though; banks and consumer discretionary companies such as luxury stores and hotels are expected to report the best growth. Banks were given a boost by Fed actions, and, despite the tough economy, luxury retailers and hotel chains are doing well as wealthy consumers continue to spend.

Next week, analysts will turn their attention to two big economic reports on Friday – the GDP report and consumer sentiment. With remaining earnings reports likely to show more of the same, investors will be looking at the GDP report to see whether the Fed’s QE3 activities are giving the economy the boost it needs. Although we can hope for some solid economic performance, there is a good chance the rest of October will be turbulent for markets.

HEADLINES:

Unemployment rate falls in 41 states in September. According to the Bureau of Labor Statistics, the U.S. saw a sharp drop in the unemployment rate in all but 9 states last month. South Carolina posted the largest improvement, with its unemployment rate falling from 9.6% to 9.1%.

Home resales fall in September. Sales of existing homes retreated from a two-year high last month, reminding us that the housing market is a long way from a full recovery. Resales fell 1.7%, pushed lower by tight inventory and a slowdown in distressed sales.

Mortgage processing delays may undermine QE3. To meet surging demand for mortgages after the Fed’s QE3 housing boost, banks are hiring new mortgage processors. However, they are still struggling to process applications, leading to delays for beleaguered mortgage applicants.

European bank shares fall on new discord. Shares of European banks fell last week as EU nations bickered over how to help debt-ridden Spain and Greece. While some analysts believe this is a blip, others believe that markets could fall further if permanent solutions are not found.

QUOTE OF THE WEEK:

“Be a student by staying open and willing to learn from everyone and anyone”- Dr. Wayne Dyer


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