Stocks Rise on Solid GDP Report; Q4 Earnings Beating Expectations

Stocks have plenty to chew on in today’s session, ranging from a solid GDP report to a barrage of earnings releases and a major deal out of Google (GOOG) ahead of its earnings release after the close today. Sentiment is on the positive side at the open, but the emerging market angst is very much with us and could cause the opening gains to dissipate later in the session.

The GDP report is very reassuring even though ‘headline’ growth rate of +3.2% was a tad bit short of expectations. The report’s internals are very strong, with consumer and business spending strength offsetting surprising weakness in government spending and housing (residential fixed investments). Most economists were looking for flat government spending, with the decline likely a function of the shutdown. The housing shortfall is likely a function of weather related factors as other indicators continue to show momentum in the sector.

Adjusting for government spending and housing, Q4 GDP growth would have been close to Q3’s +4.1% pace. Estimates for the current quarter remain in the +2% vicinity, with growth expected to accelerate in the following quarters. But keep in mind that initial estimates for Q4 GDP growth were as low as +1%, but kept going up as the quarter unfolded. What all of this boils down to is that the U.S. economy accelerated to a materially higher growth pace in the second half of 2013 and that momentum is expected to carry into this year and beyond.

Also dominating the headlines this morning is Google’s deal to sell its Motorola business to China’s Lenovo. Google will retain most of the patents that were supposedly the motivation for its Motorola purchase in the first place. Importantly, the deal makes Lenovo a major player in the Android space, creating a major rival for Samsung by bringing down the company’s dominant position in the Android landscape. Google’s exit from direct handset manufacturing may be perceived as having implications for Microsoft’s (MSFT) Nokia (NOK) purchase. But these are two different situations as Microsoft needs to establish Windows as a credible operating system in the mobile space and needs a dedicated manufacturer to produce the handsets. Google never had that problem. In fact, its Motorola purchase put it in competition with other handset makers in the crowded Android space.

On the earnings front, this morning’s barrage of earnings reports takes us past the halfway mark in the 2013 Q4 reporting season, with results from more than half of the market capitalization of the S&P 500 already out. Total earnings for the 212 S&P 500 members that have reported results (55% of the index’s total market capitalization) are up +14% from the same period last year, with 71.2% beating earnings expectations. Total revenues are up +2.3%, with 52.8% beating revenue expectations.

This the best earnings performance of 2013 for this group of companies in terms of growth rates and beat ratios. That said, we haven’t seen much of a difference on the guidance front, with companies still providing an underwhelming outlook for the current and coming quarters. As a result, estimates for current quarter have been steadily coming down as the Q4 reporting season has unfolded. Total earnings for the S&P 500 are now expected to be down -1.2% in 2014 Q1 compared to expectations of +2% growth at the start of the month. What this means is that the negative estimate revisions trend that we have been seeing quarter after quarter for more than a year will remain with us some more.

The market didn’t pay much attention to this revisions trend the last couple of years, but the ongoing emerging market scare is making investors realize that they need to be a bit more attentive to fundamentals. Maybe the improving domestic economic landscape, as this morning’s GDP shows, will reverse the negative trend in estimate revisions going forward. We haven’t seen any evidence of that in the earnings data as yet.

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