Each week, we tap the insight of Sam Stovall, Chief Equity Strategist for S&P Capital IQ, for his perspective on the current market.
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EQ: Earnings season for the fourth quarter is set to kick off this week. Looking at corporate guidance, management seems to be a bit pessimistic for the coming reporting season don’t they?
Stovall: Yes, they do. S&P Capital IQ reported that 100 companies have issued Q4 2014 guidance, and 80 of them showed negative guidance, producing a negative-to-positive ratio of 8.0, which is much higher than the average 2.5 ratio over the past 15 years. So either companies are really trying to guide lower, and therefore increase their likelihood of exceeding their guidance in the fourth quarter, or maybe we will have a bumpy quarter ahead.
EQ: Telecom Services is expected to increase year-over-year by almost 80 percent in Q4. We’ve discussed some of the reasons why Telecom’s numbers have looked so good on a comparative basis to the prior year. Is this sector as strong as those estimates seem?
Stovall: No, actually they’re not. We’re certainly seeing an improvement in earnings for the large wireline companies from fewer subsidies that are being paid out for customers of handsets to entice them to join a company’s particular network.
However, the overriding factor is that Sprint is no longer in the index and since Sprint (S) recorded a decline last year, then on a year-over-year basis excluding Sprint, that’s the reason for what looks like a stellar performance for Telecom.
EQ: Financials looks to be another leader this quarter. There are many components to watch for this sector, but what particular areas do you expect to see leading the group as a whole?
Stovall: Financials are projected to do pretty well for Q4. Wall Street is expecting a 31-percent increase over Q4 of 2012. We think we’re going to see an improvement in loan growth and continued release of reserves. We’ll probably see an increase in some trading activity as well. But Financials covers a variety of categories: insurance, banking, REITs, etc.
So just looking at sub-industries individually, I find that those categories showing strong earnings increases are Multi-line Insurances, Diversified REITs, Life and Health Insurance, Other Diversified Financial Services, and Property and Casualty Insurance. Insurance represents three of the five biggest earnings improvers for the coming quarter. I would tend to say that insurance companies will probably have their day in the sun this quarter. Some of the other categories—in particular Office REITs, Residential and Industrial REITs, combined with Thrifts and Mortgage Finance—are showing year-over-year declines.
EQ: What are some of the major headwinds right now that have you concerned achieving the expected 10-percent earnings growth for 2014?
Stovall: I think it’s still somewhat speculative right now. The estimate is for 10-percent growth, but maybe it ends up being something along the lines of about 6, 7 or 8 percent—somewhere closer to where it was at in 2013. Some of the headwinds include higher interest rates and a strengthening U.S. dollar. Because with the Fed likely to taper its way down to zero by September or October 2014, the implication is that the economy is improving and that would help push up interest rates, and strengthen the value of the U.S. dollar. So we could find that for many of these multi-national firms, a higher dollar (because of currency translation) ends up costing them in terms of EPS growth.
But that said, we also expect GDP in 2014 to rise by 2.8 percent versus the expected 1.9 percent for all of 2013. So maybe we make up in general economic growth what we lose as a result of that growth in the form of higher interest rates and a strengthening dollar.