Efforts by the Turkish central bank appear to have calmed that country’s currency a bit, but the broader emerging market fear that roiled the markets last week is still very much with us. Loss of growth momentum in China and the fear of Fed Taper on vulnerable developing economies like Turkey, Argentina, South Africa and others have brought back memories of the late 1990’s emerging market crisis that originated in Southeast Asia.
Actions of the U.S. Fed were not at play in the 1990’s crisis, but they are believed to the direct trigger for this one. One wonders though why the emerging market worm would start moving almost four weeks after the Fed’s Taper announcement. After all, the Fed announcement came in later December and the emerging market reaction is showing up only now.
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The Fed Taper angle could very well be the correct angle to understand the ongoing Emerging market turmoil, but I suspect that the passing of the global growth baton to the developed world also has something to do with it. China and the other emerging markets were the primary drivers of global growth for more than a decade, but we are passing through a transition phase now when the developed economies of the U.S., Europe, and Japan appear poised to reclaim leadership roles.
For stock market investors, the most important effect of the emerging market story is that it has prompted investors to start paying close attention to everything with a critical eye. Investors had become used to a world in which nothing could go wrong and stocks always went up, irrespective of fundamentals.
They are using this rediscovered critical eye to evaluate the ongoing Q4 earnings season and don’t seem to be overly impressed with what they find, even though it isn’t materially different from what we have being seeing in recent quarters.
We have a very busy reporting docket this week, with more than 120 S&P 500 companies reporting results, including Apple (AAPL) after the close today and Google (GOOG), Facebook (FB) and Amazon (AMZN) later this week. But including this morning’s better than expected report from Caterpillar (CAT), we now 2013 Q4 results from 125 S&P 500 members accounting for 33.6% of the index’s total market capitalization. Total earnings for these companies are up +18.9% from the same period last year, with 67.9% beating earnings expectations with a median surprise of +2.3%. Total revenues are up +3.5%, with 60.8% beating revenue expectations.
The +18.9% ‘headline’ total earnings growth rate is better than what we have seen from this same group of 125 companies in the last few quarters. But most of that growth momentum is due to easy comparisons for just three companies – Bank of America (BAC), Verizon (VZ), and Travelers (TRV) . Exclude these three and total earnings growth for the S&P 500 companies that have reported drops to +8.1% from +18.9%, which is about where growth has been in recent quarters. The composite picture for Q4 – combining the results for the 125 companies that have reported already with the 375 still to come – is for earnings growth of +8.5.
More important than what happened in Q4 is the question of whether management guidance for the coming period(s) will get any better from what we have become accustomed to in recent quarters. My sense is that the preponderance of guidance will remain negative, as has been the case for more than a year now. This will keep downward pressure on estimates for the coming quarters.
Investors didn’t pay much attention to negative estimate revisions over the past couple of year, but they will likely be a bit more discerning and discriminating in the coming days. That’s my takeaway from the ongoing emerging market saga.
