Favorable looking headlines from China and Europe and a mixed batch of earnings reports provide the backdrop for today’s trading action. The GDP report out of China shows that country’s growth falling to its level in years, but it nevertheless came in better than expected.
China’s third quarter GDP growth came in at +7.3%, below the second quarter’s +7.5% growth pace and consensus estimates of +7.2%. This is the lowest quarterly growth pace since the first quarter of 2009 when the country’s economy grew at a +6.6% rate. The lower growth rate notwithstanding, the risk of a sharp fall-off in the growth rate is low. Importantly, there is little doubt about the country’s capacity to prop up growth through stimulus measures.
Unlike China, however, Europe’s capacity to fight its deflation problems has been far less clear. To that end, press reports today indicate that the European Central Bank is getting ready to start a QE program where it will be buying corporate bonds. This news comes a day after the central bank started buying asset-backed bonds.
The magnitude or size of the current asset-backed program isn’t known, but the bank has announced that they plan to increase the size of their balance sheet to the 2012 level. This means that the combined size of the asset-backed and a separate bank lending program will be about €700 billion. Given the central bank’s announcement plans about the size of its balance sheet, it is perhaps reasonable to assume that they will likely add corporate bonds to the existing asset-backed bonds program in the coming days.
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On the earnings front, we got a mixed batch of reports from bellwether operators. Travelers (TRV) and United Technology (KO) came out with strong results, while Coca Cola (LOGI) and McDonald’s (MCD) came short of estimates. Including these and other reports this morning, we now have Q3 results from 107 S&P 500 members that combined account for 34.6% of the index’s total market capitalization.
Total earnings for these 107 companies are up +6.1% from the same period last year, with 67.3% of the companies beating earnings estimates. Total revenues are up a much stronger +4.9%, with 48.6% beating top-line estimates.
The earnings and revenue growth rates for these 87 companies are modestly below the level we saw in 2014 Q2 for the same group of companies, but essentially in-line with the 4-quarter average growth pace. This is particularly so when the aggregate picture is viewed on an ex-Finance basis to adjust for the outsized Bank of America (BAC) charge.
Positive surprises for the S&P 500 as a whole are tracking a bit below Q2 levels, but largely along the 4-quarter run rate. Surprises are a bit numerous when viewed on an ex-Finance basis. Bottom line, on most conventional comparative metrics, the Q3 earnings season is tracking closely what we have seen in other recent quarters, on most conventional comparative metrics.
