Stocks Erase Summer Losses – Back to New Highs?

The market’s impressive comeback over the past month has helped erase all of the late-summer losses. Driving the gains is hope of continued Fed support on the back of a softer domestic economic backdrop.

The expectation is that weak US data will prompt the Fed to delay the interest rate lift-off from next month to sometime early next year, even though the Fed’s latest statement left the December timeline on the table. Monday’s factory sector ISM survey was right along those lines, even though it actually came in modestly above estimates. My sense is that that if the October non-farm payroll report coming out on Friday fails to reverse the negative trend we’ve seen in the last couple of monthly jobs readings, then the possibility of a December lift-off will vanish.

The fact that the market’s recent gains came through in the midst of a fairly weak earnings reporting season is particularly notable. If one hadn’t paid any attention to the earnings reports, then one would think that market participants were finding the earnings season strong enough to push stocks higher. But we do pay close attention to earnings reports, and we know that the earnings picture is anything but good. Revenue growth is non-existent, not only in Q3 but also in the current period, and the outlook for the following period isn’t that inspiring either.

[Read: Craig Johnson: Secular Bull Market Is Alive and Well; The End Is Not Nigh]

With respect to the Q3 scorecard, including this morning’s reports form Kellogg (K), Archer-Daniels-Midland (ADM) and others, we now have Q3 results from 378 S&P 500 members. Total earnings for these companies are down -1.5% on -4.7% lower revenues, with 70.1% beating EPS estimates and 43.5% beating revenue estimates. Excluding the Energy sector drag, total earnings for the rest of the index would be up +5.5% on +1.4% revenue gains.

Looking at Q3 as a whole, combining the results that have come out with estimates for the still-to-come reports, total Q3 earnings are expected to be down -2.6% on -3.8% lower revenues, the second quarter in a row of negative growth on the top- and bottom-lines.

As we have been pointing out repeatedly in this space already, estimates for the current period have been coming down at an accelerated pace, in line with weak management guidance. Total earnings for the S&P 500 index are currently expected to be down -6.9% from the same period last year, down from an expected decline of -1.1% in mid-September – the third back-to-back quarter of negative earnings growth.

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