It’s all about the Fed today, with the FOMC concluding its two-day session later this afternoon and expected to provide clear indicators about its next steps in the statement. Beyond the Fed, the parade of weak earnings reports continues, with the Q2 earnings season now past the halfway mark following this morning’s reports.
The Fed has been working for years now to become transparent and make monetary policy predictable. They definitely want the markets to be ready when the first interest rate increase arrives, which a majority of market participants believe will be at the Fed’s September meeting. The FOMC meeting concluding this afternoon is the last session before the September meeting and, in a way, provides the last major opportunity to the committee to show its hand to market participants. On top of that, we have developments in the U.S. economy that the FOMC members likely find reassuring, particularly with respect to the labor market.
[Read: The Fed’s Dilemma]
The inflation picture is admittedly a lot less certain given developments in the commodity markets and questions about global growth. But even the inflation picture isn’t so uncertain to stop the FOMC from taking a modest step in the direction of normalizing monetary policy, which is exactly what a 25 basis points rate hike in September will be.
What I am trying to say is that conditions appear right for a September rate hike, which makes it all the more important for the Fed to show its hand at the conclusion of its current meeting later this afternoon. Unfortunately, this meeting doesn’t have the Chairwoman’s presser or economic projections from the committee members, which means that the post-meeting statement is the only vehicle at their disposal to communicate with the markets. I will be looking for a clear indication from the Fed in the statement today to that end.
On the earnings front, this morning’s reports from the likes MasterCard (MA), International Paper (IP) and others pushes us past the halfway mark in the Q2 earnings season, with Q2 results now from 259 S&P 500 members that combined account for 63.3% of the index’s total market capitalization. Total earnings for these 259 index members are up +3.2% on essentially flat revenues (up +0.2%), with 73.1% beating EPS estimates and 47.3% coming ahead of top-line expectations.
As we have stated in this space repeatedly in recent days, these growth rates are materially below what we have been seeing from the same group of companies in previous quarters, though the beat ratios are on the high side relative to historical levels for earnings, and on the low side for revenues.
[See also: Conditions in the US Are Improving, Not Deteriorating]
The composite picture for Q2, combining the actual results from the 259 S&P 500 members that have reported results to estimates for the still-to-come 241 index members, is for total earnings to decline -1.6% from the same period last year on -4.6% lower revenues. Estimates for the current period have been coming down as companies have been overwhelmingly guiding lower as they report Q2 results, in line with the well-established trend of the last couple of years.
Total earnings for the S&P 500 index are currently expected to be down -4.2% in Q3 from the same period last year. And with the index earnings in the last quarter of the year now expected to be down -1%, full-year 2015 growth expectations have disappeared. Hopes remain high for next year, with earnings growth expected to accelerate to a double-digit pace in 2016.
