It’s all about Europe today, with the region’s central bank finally coming around to doing things that they had long promised they would do. Markets were looking for the Euro-zone version of the QE and the European Central Bank (ECB) finally came through on that today. With this action, Mario Draghi, the ECB president, proved that he is able to deliver on his word, which is good for the long-term credibility of the institution.
The U.S. Fed, the Bank of England and the Bank of Japan have been using QE programs in a variety of ways for years now and they have largely been successful in keeping interest rates low and pushing investors into riskier assets like stocks. That’s why a lot of people — yours truly included — credit the U.S. Fed for the strong stock market momentum of the past few years. But QE programs aren't all around successes either; there is little disagreement about their role in inflating stocks and other riskier assets, but their role in helping the underlying economies is hotly debated.
Many QE partisans would credit the current improved U.S. economic outlook to the Fed’s aggressive moves. But that claim is also fiercely rebutted by claims that the U.S. economic picture would have likely gotten even better without the Fed prop. Whatever the case, the fact remains that QE programs are stock-market friendly, but their long-term utility to the underlying economy is far from clear. In the case of the Euro-zone, the hope will be two fold: First, that the ECB’s move will help anchor expectations appropriately enough to lower deflation risks, and second, that the easing of pressure on the Euro-zone member countries will not reduce their appetite for structural reforms.
[Read: ECB Preview: FAQ]
Europe’s QE aside, we are in the midst of the 2014 Q4 earnings season, which has gotten off to a relatively weak start. Including this morning’s reports from Traveler’s (TRV), Verizon (VZ), Union Pacific (UNP) and others, we now have Q4 results from 76 S&P 500 members that combined account for 21.6% of the index’s total market capitalization. Total earnings for these 76 companies are up +2.8% from the same period last year on +2.1% higher revenues, with 75% beating EPS estimates and 46.1% coming ahead of top-line expectations.
Finance remains a drag on the aggregate growth picture, with total earnings for the sector (48% of the sector market cap has reported results) down -7.3% on -2.5% lower revenues. Excluding the Finance sector from the results thus far, total Q4 earnings for the S&P 500 index would be up +11.2% on +4.2% higher revenues.
Except for the earnings beat ratio, the Q4 reporting season isn't comparing favorably with other recent quarters – meaning earnings and revenue growth rates are lower and fewer companies are beating top-line estimates. Guidance remains weak, causing estimates for the current quarter to keep coming down.
