As Sam Sees It: Investors Climbing Another Wall of Worry Ahead of Q3 Earnings

Sam Stovall  |

Each week, we tap the insight of Sam Stovall, Chief Equity Strategist for S&P Capital IQ, for his perspective on the current market.

EQ: Less than two weeks ago, the S&P 500 established a new all-time high and for the most part, stocks looked to be in pretty good shape. As we enter the fourth quarter, however, it seems like the market is suddenly asking a lot of questions about issues that aren’t really new. What happened to spark the sentiment shift?

Stovall: I think what’s happening right now is investors are experiencing an alphabet soup of emotional concerns, from China to the dollar, to Ebola, and the Fed. I say emotional concerns because those are very hard to quantify. It’s hard to quantify how Beijing will respond to the protestors in Hong Kong, and what the reactions from global stock markets will be.

The dollar is strengthening because we’re finding a bit of a flight to safety, combined with an attraction from international investors to come to the U.S. bond and stock markets. We continue to worry about the Fed and when they’re going to raise rates.

But the newest concern is the Ebola virus, and how it’s actually made it to the U.S. shores. The worry is whether this is just one of many concerns regarding Ebola, and if it gets spread across the U.S. It’s the things that are unquantifiable, in my opinion, at this point that are causing the greatest concern.

EQ: Earnings for Q3 officially begin next week. What are the expectations going in? There seems to be less negative sentiment heading into the reporting season than from recent quarters in the past.

Stovall: Expectations are actually pretty good. S&P Capital IQ consensus estimates project third-quarter bottom-line growth at 6.7%, which is basically in line with the estimates at the beginning of the second quarter. However, as we have mentioned before, the actual results usually end up being a good 3-4% higher on average, and that’s what happened this time around. We had estimated about 6.4%, and we ended up getting 10.3%

So the bar for Q3 has been set even a little bit higher at 6.7%. If history repeats itself, and there’s no guarantee it will, we could be seeing another 10%-plus quarter advance in S&P 500 earnings.

In addition, all 10 sectors are expected to post earnings increases—with the weakest being Consumer Staples at about 3%. Also, right now the negative-to-positive ratio is only 1.0, which is lower than the 15-year average of 2.4. So basically, we have the same number of negative and positive companies reporting at this point, whereas we usually have a much greater skewing toward the negative side of the ledger.

EQ: You stated in this week’s Sector Watch that the sell-off we’re experiencing could be induced by window dressing. How does this affect the market? Could it add to a deeper pullback or correction?

Stovall: Window dressing, if that were the reason, should have ended on Sept. 30 because it’s when mutual funds and financial advisors try to get rid of stocks that they really don’t want to show their clients when they report end-of-quarter holdings. So since Wednesday was the first day of the new quarter, the window dressing would not apply.

I think the concern now is possibly investors who put in sell orders to close out their positions at the end of the third quarter combined with the news of the Ebola case in Texas. I think that it’s rattling the market in general, and airline stocks in particular. So we just have to wait and see how far this plays out. Right now, the Russell 2000 has broken below its earlier low point, so now we are officially in correction territory—on an intraday basis, anyway—down more than 10%. I think investors are also concerned with the message that the small-cap weakness is sending to the market.

EQ: You also recently had a webinar discussion with Scott Kessler, Sector Head, Technology Equity Research; Todd Rosenbluth, Director of ETF Research; and Aaron Uitenbroek, Managing Partner, i10 Research to discuss the investment outlook and recommendations going forward. The webinar replay can be accessed here. Are there any highlights you’d like to share from the discussion?

Stovall: The main takeaway from the webinar is that there’s always a bull market someplace. I started off by discussing historically what happens in the fourth quarter of any year, and historically what happens after the uncertainty surrounding mid-term elections has run its course. I also discussed earnings projections, valuations, and specifically the favorable valuation backdrop that we see for the Technology sector.

We then talked specifically about Technology stocks for which we have buy and strong buy recommendations. We also then discussed ETFs that are technology-related and that have overweight recommendations by S&P’s ETF evaluator service. Lastly, we had some technical contributions from i10 Research, from whom we contract for technical analysis.

So I would tend to say that it’s a reminder to investors the breadth of the research service offering that we have for financial advisors, who can get a free 14-day trial by going to For retail investors who are looking to pay something closer to $200 per year, they can check us out at

But in general, it was a confirmation that there’s always a bull market someplace, and also simply a reminder to our clients that we do more than just make buy, hold, and sell recommendations on individual stocks.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:



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