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CHICAGO, Sept. 30, 2013 /PRNewswire/ -- Zacks.com releases the list of companies likely to issue earnings surprises. This week's list includes Walgreens (NYSE:WAG-Free Report), Monsanto (NYSE:MON-Free Report), Constellation Brands (NYSE:STZ-Free Report), Nike (NYSE:NKE-Free Report) and FedEx (NYSE:FDX-Free Report).
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Washington Spotlight Clouds All Else
Developments in Washington DC are in the spotlight, stealing the limelight from a host of top-tier economic data and a steady trickle of 2013 Q3 earnings reports. Reporting season has gotten underway and 17 S&P 500 companies already come out with results, as of Friday September 27, 2013. This week brings earnings reports from 20 companies, including 4 S&P 500 members. Walgreens (NYSE:WAG-Free Report), Monsanto (NYSE:MON-Free Report) and Constellation Brands (NYSE:STZ-Free Report) are some of the notable companies reporting results this week.
We have had a few strong earnings reports already, particularly from Nike (NYSE:NKE-Free Report) and FedEx (NYSE:FDX-Free Report), but the overall trend at this admittedly very early stage is mixed. The market isn't paying much attention to the Q3 earnings season at this stage as all the focus is on handicapping the odds of a government shutdown and, more importantly, the debt ceiling issue. The day of reckoning on the budget/shutdown issue is upon us, though we still likely have a couple of more weeks before the debt ceiling will positively need to be raised. Needless to say that this DC spotlight isn't market friendly as it heightens the real or perceived risks to the economy.
Low Expectations for Q3
As has been the case at the start of recent quarterly earnings cycles, expectations for the Q3 earnings season have fallen sharply over the last three months. Total earnings for companies in the S&P 500 are now expected to be up only +1.1% from the same period last year, down from +1.2% last week and +5.1% at the start of the quarter in early July.
This negative revisions behavior is hardly unusual as we have been repeatedly seeing this pattern play out in recent quarters. Companies have been overwhelmingly guiding lower, prompting analysts to cut estimates for the following quarter. The revisions behavior ahead of the Q2 earnings season was no different and most of the same sectors have experienced negative revisions this time around as well. The 'regulars' on the negative estimate revisions beat include Technology, Basic Materials, and Industrials. But in addition to those sectors, Retail and Consumer Discretionary have played material roles in bringing down expectations for Q3 as well.
Estimates for other sectors have come down as well, with even the Finance sector earnings expected to be up +6.2% now vs. the +8.1% that was expected in early July. Energy, Utilities, Conglomerates and even Construction have suffered negative revisions in varying degrees.
High Expectations for Q4
While estimates for Q3 have come down, the same for Q4 and the following quarters have held up fairly well. Part of the extremely strong growth expected in Q4 is a function of easier comparisons, as 2012 Q4 represents the lowest quarterly earnings total for the S&P 500 in the last six quarters, with the comps particularly easy for the Finance sector. But it's not all due to easy comparisons, as the expected earnings totals for Q4 represent a new all-time quarterly record.
Total earnings for the S&P 500 reached a new record at $256.5 billion in Q2, surpassing Q1's $254.1 billion record. But they are expected to reach $273.5 billion in 2013 Q4, with total earnings growth outside of Finance expected at +8.5%.
Judging by what has happened over the past year or so, these Q4 estimates will come down as companies share their outlooks on the Q3 earnings calls. The market didn't care much as estimates came down in the last few quarters, hoping for better times ahead. Will it do the same this time as well, pushing its hopes of earnings ramp up into 2014? We will find out the answer to that question over the next two months.
The Washington Drama
Headlines from Washington DC will be all the rage this week, but we have a full docket of top-tier economic data coming out this week as well. Most of recent economic data, like Jobless Claims, New Home sales, and Personal Income/Spending has been good enough to allow the Fed to start the Taper process. But perhaps the Fed was justifiably wary of going that route in the last meeting given the coming budget/debt ceiling battles in Congress.
The most important report coming out this week is the September non-farm payroll report coming out on Friday. We will also get the two ISM surveys, the private sector jobs tally from ADP and other economic readings this week.
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Since 1988, the Zacks Rank has proven that "Earnings estimate revisions are the most powerful force impacting stock prices." Since inception in 1988, #1 Rank stocks have generated an average annual return of +28%. During the 2000-2002 bear market, Zacks #1 Rank stocks gained +43.8%, while the S&P 500 tumbled -37.6%. Also note that the Zacks Rank system has just as many Strong Sell recommendations (Rank #5) as Strong Buy recommendations (Rank #1). Since 1988, Zacks Rank #5 stocks have significantly underperformed the S&P 500 (+3% versus +10%). Thus, the Zacks Rank system allows investors to truly manage portfolio trading effectively.
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