Earnings Focus of Market

The last several weeks have seen quite a bit of market volatility for a variety of reasons. We have seen uncertainty surrounding Chinese growth, as well as reactions from the Federal Reserve’s monetary policy decisions. There were concerns that disappointing corporate earnings could further compound the recent market volatility which actually drove markets lower for a few days. While it has not been easy, it is important to try and “weed through” the media noise and look at how corporations are actually performing through it all. It is also important to understand their guidance, as most companies continue to see pressure from a strong U.S. dollar as a headwind.

Overall, we are now in the second week of corporate earnings releases and it appears that the “fears” we were hearing were a bit premature. As of this morning, 56 of the companies in the S&P 500 have reported earnings. 41% have exceeded their revenue expectations, though most “beats” have not been exceedingly strong. When examining the 3rd quarter as a whole, it appears that earnings will be down approximately 4.5% year-over-year. The majority of the drag will continue to come from the energy sector. The financial sector, on the other hand, is showing signs of strength. A report by Zacks Research indicates that, without the financial sector earnings, S&P 500 earnings could be down as much as 9% in the fourth quarter (from approximately 5.2% down in the current estimates). And excluding energy, results are expected to be flat over last year. Still, earnings continue to improve and we expect that next week’s earnings releases will be the main driver for financial markets (barring any black swan type event).

Earnings from Various Companies:

While last week was the beginning of earnings season, very few companies reported. This week and next see the “bulk” of the earnings releases and have steered the market in a positive direction. Below are summaries from a few companies that reported this week:

Bank of America (BAC) reported stronger than expected earnings due to plummeting legal costs that have plagued the company since the financial crisis. The company earned a profit of $4.51 billion in the third quarter, or $0.37 per share. This was higher than the average analyst estimate of $0.33 per share. Bond trading revenue fell, as it has across multiple different banks/brokerages, though Bank of America saw a rise in revenue from its stock-trading unit. Low interest rates, which affect most banks, seem to particularly have affected Bank of America’s revenues these last few years due to its large consumer lending and mortgage arms. The company continues to cut costs, focus on profitability, and is poised to continue profit growth, even if interest rates remain low. Should they rise, however, the bank surely stands to benefit.

Citigroup (C) stated its third quarter profit jumped 51% year-over-year, also due to a large drop in legal costs. Overall, the bank reported earnings of $1.31 per share, higher than the average analyst estimate of $1.28 per share. Like Bank of America, Citigroup saw a decline in revenue from its bond trading division. Citi also saw some weakness in its credit card division. However, gains in stock trading and its high net worth banking division ultimately outweighed the few areas of weakness.

Blackstone Group LP (BX) posted its first quarterly loss in four years as volatile markets reduced the value of some of its underlying holdings. Overall, the company lost $255 million in the third quarter, or $0.40 per share, down from a $0.41 profit in the third quarter of last year. As private equity can have its ebbs and flows from a profitability perspective, a more closely watched measure of company health is the economic net income, which includes unrealized gains/losses. This measure came in at a $0.35 per share loss, down from a positive $0.66 gain last year. This loss was steeper than analysts were expecting, though the shares ultimately rose as Blackstone stated they are utilizing this opportunity to add to their investment portfolio by purchasing assets now trading at more attractive prices.

General Electric (GE) reported a third quarter profit of $0.29 per share, higher than the average analyst estimate of $0.26 per share. The company’s aviation, power & water, and transportation arms were strong, leading to a 4.6% profit growth in its industrial operations units. Its appliances and lighting business, seen by many analysts as the next spin-off target, saw an 88% rise in profits. But the oil and gas sector (expectedly) weighs on earnings a bit. Profits fell 12% and orders plummeted 38%. Still, it was an overall good quarter for GE, which is now focused on completing the spin-off of Synchrony Financial (formerly known as GE Capital).

Intel (INTC) stated a shrinking personal computer business hurt sales but that higher chip prices helped soften the blow. Overall, its third quarter profits fell 6.3% year-over-year to $0.64 per share, which came in higher than the average analyst estimate of $0.59 per share. CEO Brian Krzanich said it appears that the PC market is stabilizing and that the company should benefit from its new Skylake microprocessors. The company’s fourth quarter guidance came in right at analyst expectations.

Wal-Mart (WMT) surprised the markets on Wednesday when the company released a preliminary outlook on its 2016 profits. The company issued guidance at a meeting with analysts, stating that they expect profits to drop as much as 12% next year as they increase wages and look to boost online sales (at the expense of retail stores). This sent a ripple effect through the markets, which fell on the day. WMT itself saw a 10% drop, the biggest one-day fall in its history. Though profits are expected to fall due to the wage increases, the company believes paying its employees more will reduce turnover, increase its quality of workers, which should ultimately save the company money in the long-run.

Next week is perhaps the biggest week in terms of corporate earnings, due to the sheer number of companies reporting, as well as the guidance the companies will issue, which should give us a window into how various sectors of the U.S. and world economies are expected to perform. A few notable companies reporting next week are: Halliburton (HAL), IBM (IBM), Verizon (VZ), Boeing (BA), Coca-Cola Co (KO), General Motors (GM), Kinder Morgan Inc (KMI), 3M (MMM), Alphabet (GOOGL), AT&T (T), Caterpillar (CAT), Freeport McMoRan (FCX), McDonalds (MCD), Microsoft (MSFT), Procter & Gamble (PG), and Ventas (VTR).


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