Earnings Not Great, But Good Enough – For Now
Equity markets rebounded from last week’s losses amid positive economic data and mixed earnings reports. Annualized gross domestic product (GDP) grew 2.3% in the second quarter and a revised 0.6% in the first quarter, which had previously been reported as an actual contraction. The GDP reading was consistent with the Fed minutes released on Wednesday which pointed to gradual improvements in the job and housing markets.
First, the bad news. Exxon Mobil and Chevron both ended the trading week at 52-week lows after earnings fell over 50% year-over-year for both firms. Additionally, Exxon Mobil was forced to write down $2.6 billion in assets. Facebook beats the top line expectations of analysts, but traded lower after earnings due to rising expenses. Other social media names Twitter, LinkedIn, and Yelp all dropped over 10% following disappointing quarterly reports that showed slower organic growth for each company.
On the bright side, Ford Motor Co. beat estimates by a wide margin on strong North American demand for sport utility vehicles and trucks. On the whole, other leading companies in the auto, trucking, and consumer discretionary sectors outperformed expectations, highlighting that many are performing better than the perception that the economy as a whole is suffering. Importantly, those areas of the market and the domestic economy that would normally function as the proverbial “canaries in the coal mine” of recession (and resulting bear market for stocks) are not sending such danger signals at the moment.
With 353 members of the S&P 500 reporting results to date, earnings are expected to fall 2.8% for the second quarter. However, earnings have been better than expected as profits were initially forecasted to fall by 6.5%. Importantly, earnings are expected to grow by 4.1% in the second quarter if the energy sector is excluded. Looking ahead, many consumer related names are left to report quarterly results. With the benefit of low gas prices and an improving labor market, earnings reports are likely to show more positive surprises.