Solid Earnings Season Spelled Out

November 10th Weekly Market Update

The market’s focus was clearly on the midterm elections last week (November 3 – 7) with the Republicans taking control of the Senate — as expected — and adding to their majority in the House. While the certainty provided by an election outcome has been positive for the stock market over time (as we wrote in our September 2, 2014 Weekly Market Commentary: Midterms May Mean More Gains for Stocks”), our still positive stock market outlook is based much more on fundamentals. It does not get more fundamental than earnings, so this week we provide a wrap-up of third quarter earnings season.

Earnings Season by the Letters

If you have young children, spelling is always on your mind. In that spirit, this quarter we present our earnings recap using E-A-R-N-I-N-G-S as an acronym. In the interest of time, we have chosen not to do the A-B-Cs of earnings season and comment on 26 topics. Truth be told, we were scared off by the letter X.

E – Energy.

The elections do not impact earnings enough in the near term to be worth a letter. Instead, energy is the choice, after the sector suffered the biggest reduction to current quarter estimates (Q4 2014) among the 10 equity sectors. But in perhaps the biggest surprise this earnings season, the energy sector generated a solid upside surprise to third quarter earnings relative to expectations, as of October 1, 2014 and matched the earnings growth rate of the S&P 500 at 10% on strong performance for refiners that have benefited from lower cost oil.

 A – America.

The strength of America relative to rest of the world stood out this earnings season. While many companies highlighted the slowdown in Europe, you would be hard pressed to find a major global company that saw weakness in America. Not only did companies benefit from strength in the United States, they managed slower growth in Europe effectively and generated the typical amount of upside to third quarter earnings estimates of 3 – 4%. Corporate America’s ability to manage costs, sustain profit margins, and maintain strong balance sheets has also continued to impress, and we do not expect those conditions to change anytime soon.

R – Revenue

The third quarter is on track for another quarter of 4%-plus revenue growth despite a 2.6% decline in energy sector revenue. Revenue received support from continued steady business spending (or if you prefer, another domestic product (GDP), as it has tended to do historically. The resilience (another R) of earnings estimates is another positive this earnings season, which we discuss under N below.

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