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Last Update: 23-Jul-12 08:36 ET
Reality Bites
Earnings reports haven’t been that good, and global economic trends are worrisome. That reality is sinking in this morning as futures suggest a down open of about 14 points in the S&P 500 index.
Center stage is Spain. The Spanish stock market is off over 2%, after a 5% plunge on Friday. Spanish bond yields are spiking with the 10-year government note up to 7.45%. They’re going to need a bigger boat.
The European debt crisis is a long way from over, and concerns will intensify intermittently. The market focus the past few weeks has been on earnings and the potential for quantitative easing, but Europe is likely to be a market overhang in the weeks ahead.
It has been widely reported that about 67% of companies that have reported earnings have beaten estimates. Less widely reported is the fact that 57% of companies have reported revenue below expectations. And even though earnings are on track for 6% growth this quarter, revenue is likely to come in at a very anemic 1%.
Companies can manage (manipulate) short-term earnings better than revenue. The lousy revenue trend is bad news in that it indicates underlying fundamentals at most companies are weak. If revenue growth doesn’t pick up, earnings growth through the end of the year will disappoint.
McDonald's is this morning’s example of the problems large multinationals face. Profits and revenue were below expectations, and year-over-year revenue growth was only 0.2%. Eaton also reflects these trends, with revenue below forecasts on a 0.5% decline from last year. Profits were up, however, and beat expectations in an example of a company squeezing margins higher. Halliburton reported earnings and revenue ahead of expectations but the stock price is caught in the overall downdraft this morning.
There are no economic reports today. Second quarter GDP will be released Friday. Expectations are for a sluggish 1.2% annual rate of increase in real GDP.
There will be a lot more earnings reports this week, but 11 of the top 20 market cap stocks have already reported, with the top technology and financial reports already out. The coming reports have less potential to move the broad market than recent reports such as IBM or Wells Fargo, particularly with the focus shifting to global economic concerns.
The recent, quiet upward drift in the market may be over. Near-term downside risks have increased.
--Dick Green
Founder and Chairman, Briefing.com
Center stage is Spain. The Spanish stock market is off over 2%, after a 5% plunge on Friday. Spanish bond yields are spiking with the 10-year government note up to 7.45%. They’re going to need a bigger boat.
The European debt crisis is a long way from over, and concerns will intensify intermittently. The market focus the past few weeks has been on earnings and the potential for quantitative easing, but Europe is likely to be a market overhang in the weeks ahead.
It has been widely reported that about 67% of companies that have reported earnings have beaten estimates. Less widely reported is the fact that 57% of companies have reported revenue below expectations. And even though earnings are on track for 6% growth this quarter, revenue is likely to come in at a very anemic 1%.
Companies can manage (manipulate) short-term earnings better than revenue. The lousy revenue trend is bad news in that it indicates underlying fundamentals at most companies are weak. If revenue growth doesn’t pick up, earnings growth through the end of the year will disappoint.
McDonald's is this morning’s example of the problems large multinationals face. Profits and revenue were below expectations, and year-over-year revenue growth was only 0.2%. Eaton also reflects these trends, with revenue below forecasts on a 0.5% decline from last year. Profits were up, however, and beat expectations in an example of a company squeezing margins higher. Halliburton reported earnings and revenue ahead of expectations but the stock price is caught in the overall downdraft this morning.
There are no economic reports today. Second quarter GDP will be released Friday. Expectations are for a sluggish 1.2% annual rate of increase in real GDP.
There will be a lot more earnings reports this week, but 11 of the top 20 market cap stocks have already reported, with the top technology and financial reports already out. The coming reports have less potential to move the broad market than recent reports such as IBM or Wells Fargo, particularly with the focus shifting to global economic concerns.
The recent, quiet upward drift in the market may be over. Near-term downside risks have increased.
--Dick Green
Founder and Chairman, Briefing.com
