Tuesday, January 28, 2014

Stocks: How Big a Problem are Earnings?

With earnings season in full swing–and bellwethers like Microsoft (MSFT), Bank of America (BAC) and JPMorgan Chase (JPM) already reporting–its clear that earnings are still growing–just not as fast as some had expected.

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Deutsche Bank’s David Bianco and team, for instance, lowered their earnings growth forecast in a report on Friday. They explain why:

We still think 4Q results will be the strongest S&P EPS and sales growth since 1Q12, but is unlikely to be double-digit as we were previously forecasting. We cut our 4Q13E EPS to $28.50, up 8% y/y from $29.00, up 10% y/y previously. 4Q results are healthy, but are softer than what macro data, particularly US and global PMIs suggested. Generating strong operating profit growth remains difficult given: 1) slow loan growth at Banks, 2) moderate capex growth  (Industrials healthy, Tech still slow), and 3) intense competition at most Consumer industries.

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Morgan Stanley’s Adam Parker and team don’t believe the rate of growth will matter to investors as long as earnings continue to grow:

With 31% of the S&P 500 market cap reported, aggregate earnings are tracking 4.5% ahead of expectations. Financials have had strong results, on net, with beats from both [Bank of America and JPMorgan Chase] (both in our portfolio). Exfinancials, the earnings upside has been 4.0%, driven in large part by technology ([Microsoft, Oracle (ORCL) (December), and SanDisk (SNDK)], among others). Our view is the recent market sell-off will abate as we doubt investors will worry about a real corporate earnings decline, something we think is required for a material market decline.

Shares of Microsoft have dropped 1.3% to $36.33 today at 2:21 p.m., while Bank of America has dipped 0.3% to $16.40, JPMorgan Chase has gained 0.6% to $55.44, Oracle has fallen 1.2% to $36.68 and SanDisjk is up 0.3% at $69.67.

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