From Siem Reap, Cambodia.
SLOW AND SLOWING
I currently focus on the U.S. consumer because of the fragility from overleverage. Friday’s employment report increases the risk of a consumer strike. Employment growth slowed from +175k per month on average during the past 12 months to +140k on average during the past 2 months. Employment is now rising +1.3-1.4% YoY and slowing.
Wage growth also slowed to +2.4% from +2.8% in September, bringing the labor income proxy down to +4.0% from the +4.5% range.
Nominal labor income is slowing when the savings rate is a scary low 3.1%. Good thing inflation is low…even though too low for the Fed which is tightening in this environment.
Amazon Cuts Prices on Third Party Items Ahead of Holiday Onslaught Amazon has quietly started lowering prices by as much as 9% on goods offered by independent merchants on its site, ratcheting up a price war with other retail giants—and potentially straining its relationship with some sellers.
EARNINGS WATCH
Factset’s weekly summary:
Overall, 81% of the companies in the S&P 500 have reported earnings to date for the third quarter. Of these companies, 74% have reported actual EPS above the mean EPS estimate, 8% have reported actual EPS equal to the mean EPS estimate, and 18% have reported actual EPS below the mean EPS estimate. The percentage of companies reporting EPS above the mean EPS estimate is above the 1-year average (71%) and above the 5-year average (69%).
At the sector level, the Information Technology (90%) and Health Care (80%) sectors have the highest percentages of companies reporting earnings above estimates, while the Utilities (50%) and Telecom Services (50%) sectors have the lowest percentages of companies reporting earnings above estimates.
In aggregate, companies are reporting earnings that are 4.8% above expectations. This surprise percentage is below the 1-year average (+5.1%) but above the 5-year average (+4.2%).
In terms of revenues, 66% of companies have reported actual sales above estimated sales and 34% have reported actual sales below estimated sales. The percentage of companies reporting sales above estimates is above the 1-year average (61%) and above the 5-year average (55%).
At the sector level, the Information Technology (81%) sector has the highest percentage of companies reporting revenues above estimates, while the Utilities (21%) sector has the lowest percentage of companies reporting revenues above estimates.
In aggregate, companies are reporting sales that are 1.2% above expectations. This surprise percentage is above the 1-year average (+0.6%) and above the 5-year average (+0.5%).
The blended earnings growth rate for the S&P 500 for the third quarter is 5.9% today, which is higher than the earnings growth rate of 4.4% last week. The blended sales growth rate for the third quarter is 5.8% today, which is slightly higher than the sales growth rate of 5.6% last week.
If the Energy sector were excluded, the blended earnings growth rate for the remaining ten sectors would fall to 3.7% from 5.9%. If the Information Technology sector were excluded, the blended earnings growth rate for the remaining ten sectors would fall to 2.6% from 5.9%.
If the Energy sector were excluded, the blended revenue growth rate for the index would fall to 4.6% from 5.8%.
At this point in time, 77 companies in the index have issued EPS guidance for Q4 2017. Of these 77 companies, 51 have issued negative EPS guidance and 26 have issued positive EPS guidance. The percentage of companies issuing negative EPS guidance is 66%, which is below the 5-year average of 75%.
The Q4 bottom-up EPS estimate (which is an aggregation of the median EPS estimates for all the companies in the index) dropped by 0.8% (to $34.73 from $35.00) during this period. During the past year (4 quarters), the average decline in the bottom-up EPS estimate during the first month of a quarter has been 1.2%. During the past five years (20 quarters), the average decline in the bottom-up EPS estimate during the first month of a quarter has been 2.2%. During the past ten years, (40 quarters), the average decline in the bottom-up EPS estimate during the first month of a quarter has been 2.5%.
Thomson Reuters has somewhat different numbers:
Third quarter earnings are expected to increase 7.9% from Q3 2016. Excluding the Energy sector, the earnings growth estimate declines to 5.5%.
Third quarter revenue is expected to increase 5.2% from Q3 2016. Excluding the Energy sector, the revenue growth estimate declines to 4.2%.
Trailing EPS are $127.97, 9.1% higher than one year ago. Full year 2017 estimate now $131.16.
TECHNICALS
Lowry’s Research says that breadth and the forces of Supply and Demand continue to point to sunny skies for the market in the months ahead but that clouds are building, suggesting rising risk of a short term pull back. Recent equity gains have been increasingly selective. Lowry’s analysis suggest increasing short term supply and decreasing demand.