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MPCA Weekly Market Update (October 26, 2015)

| October 26, 2015
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Big Cap Tech Earnings (and Central Bankers) to the Rescue

The S&P 500 index closed in positive territory for the fourth straight week, returning a healthy 2.09%.  Domestic equities have rallied strongly in the month of October, following a rough two month stretch with declines of 6.03% in August and another 2.47% in September.  Stocks fell quickly after the open on Monday, but bounced back to close flat for the day on very little news.  Positive data from the National Association of Home Builders Market Index came in above expectations, showing the highest level since October 2005.

Tuesday brought higher than expected housing start data along with mixed third quarter earnings news, resulting in another essentially flat, slightly down day.  Wednesday showed a more significant decline of -0.57%, with energy, materials and health care leading the way down.  Only industrials were able to show a gain on the day.

Central bank relief arrived on Thursday, and regular readers will forgive us for once again pointing out the ultimately unsustainable nature of this ongoing quasi-manipulation of the markets.  European markets pushed higher after the European Central Bank (ECB) kept rates unchanged.  The boost came from ECB president Mario Draghi, who stated (again!) that they were ready to act if needed and open to more monetary policy action.  No word on whether Eurozone governments are prepared to submit to the necessary fiscal (read: spending) reform that should accompany such monetary largess.

U.S. stocks responded as intended, opening up on Thursday and climbing along with Europe, ultimately closing the day strongly in the green, up 1.67%.  Positive economic data helped, with lower than expected U.S. initial jobless claims of 259k.  Claims were lower than the consensus estimate of 265k, but higher than the previous week’s 255k.

The main action was after hours, as big cap tech titans Google (now Alphabet), Microsoft, and Amazon weighed in with positive earnings surprises.  Combine that good news with the People’s Bank of China cutting interest rates, and the result is another up day on Friday of 1.1% and a healthy gain for the week.  Unfortunately, the widely-owned energy (-0.99%), healthcare (-0.69%) and utilities (-0.47%) sectors were unable to participate in the good news parade.

Strength in the tech sector aside, the overall picture emerging from the Q3 earnings season is one of all-around weakness.  Top line revenue growth is nowhere to be found, companies are struggling to meet lowered revenue estimates, and Q4 estimates have come down significantly.

As of this morning, with companies representing nearly 45% of the S&P market capitalization reporting, total earnings are up only 1.9% on 2% lower revenues.  This is a weak performance compared to recent quarters, with revenue weakness the glaring deficiency.

According to Zacks Research, looking ahead to the fourth quarter, total earnings for the S&P 500 are currently expected to be down 6.3% from the same period last year, which is down from an expected decline of 1.3% about four weeks ago.  This magnitude of decline in current earnings estimates is greater than the past two quarters, and indicates a continued weakening in the earnings picture.

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