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October 26 2015 - Why Do We Care About Earnings?

| October 26, 2015
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Stocks rallied again last week on a strong Tech sector showing, bringing the S&P 500 positive for the year again. For the week, the S&P 500 gained 2.07%, the Dow grew 2.50%, and the NASDAQ rose 2.97%.[1]

Every quarter, financial pages everywhere become focused on earnings reports as companies begin to dole out information on how they performed in the last quarter. So far, we've heard from 172 S&P 500 companies who have reported 2.0% higher profits on 2.1% lower revenues as compared to the same period last year. Now, higher earnings can be counted as good news, but S&P companies have gotten a boost from the Tech sector and some individual success stories. Once all reports have come in, analysts are projecting earnings to be 3.4% lower (than Q3 2014) on 5.1% lower revenues.[2] Overall, it's clear that the same headwinds that challenged firms in the second quarter stayed with us.

Why do earnings matter? For stock investors, earnings season matters because underlying earnings influence price movements. Since stocks are just ownership shares of a company, (all things being equal) good news for the underlying firm will generally result in upward movement of the stock. Bad news is usually greeted with a drop. Now, these relationships get tricky when investors anticipate good or bad news and buy or sell a stock to speculate before earnings reports come out. That's one reason markets are often more volatile during earnings season.

For everyone else, earnings reports are a good way to get a look at the business climate for U.S. firms. Earnings reports contain a lot of information: revenues, profits, challenges, expectations about the future, and often special notes by company managers. This data is a goldmine for analysts as they create forecasts about the future.

As financial professionals, it's our job to search for the individual success stories for our clients. We are always on the lookout for opportunities and strategies to help our clients pursue success in challenging markets. If you have any questions about earnings or strategies for volatile markets, please let us know.

The week ahead is brimming with more earnings reports that should further clarify the business picture for U.S. companies. The Federal Reserve is also hosting its October Open Market Committee meeting and will announce any rate changes or other moves on Wednesday. Very few (if any) analysts expect the Fed to change interest rates at this meeting; however, investors will be interested to see if the Fed issues any guidance about whether to expect a hike in December or early next year. Has "Fed fatigue" set in?[3] Maybe, but markets could still react to unexpected news from central bankers. The other big data release is our first look at third-quarter economic growth. We'll keep you updated.

ECONOMIC CALENDAR:

Monday: New Home Sales, Dallas Fed Mfg. Survey
Tuesday: Durable Goods Orders, S&P Case-Shiller HPI, Consumer Confidence
Wednesday: International Trade, EIA Petroleum Status Report, FOMC Meeting Announcement
Thursday: GDP, Jobless Claims, Pending Home Sales Index
Friday: Personal Income and Outlays, Employment Cost Index, Chicago PMI, Consumer Sentiment


Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance and Treasury.gov. International performance is represented by the MSCI EAFE Index. Corporate bond performance is represented by the DJCBP. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

HEADLINES:

Jobless claims edge upward. New claims for unemployment benefits rose slightly last week, although the number still remains close to historical lows. While no seasonal factors were officially reported, employers could be preparing for the holiday shopping season by hanging on to employees.[4]

Existing home sales rise in September. Sales of existing housing stock spiked to the second-highest level since February 2007. The increase puts existing home sales 8.8% higher than September 2014, likely due to favorable mortgage rates and an improving labor market.[5]

Housing starts soar in September. Groundbreaking on new U.S. properties rose more than expected last month on rising demand for rental apartments. While the boost in housing market activity is great news, higher rental demand may come at the cost of lower home purchases.[6]

China's central bank cuts rates again. The People's Bank of China cut interest rates for the sixth time since last November in an effort to boost economic activity. The bank also lowered bank reserve requirements, making it easier for banks to finance loans.[7]


These are the views of Platinum Advisor Marketing Strategies, LLC, and not necessarily those of the named representative, Broker dealer or Investment Advisor, and should not be construed as investment advice. Neither the named representative nor the named Broker dealer or Investment Advisor gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your financial advisor for further information.


Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

Diversification does not guarantee profit nor is it guaranteed to protect assets.

The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. The DJIA was invented by Charles Dow back in 1896.

The Nasdaq Composite is an index of the common stocks and similar securities listed on the NASDAQ stock market and is considered a broad indicator of the performance of stocks of technology companies and growth companies.

The MSCI EAFE Index was created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in major international equity markets as represented by 21 major MSCI indexes from Europe, Australia and Southeast Asia.

The Dow Jones Corporate Bond Index is a 96-bond index designed to represent the market performance, on a total-return basis, of investment-grade bonds issued by leading U.S. companies. Bonds are equally weighted by maturity cell, industry sector, and the overall index.

The S&P/Case-Shiller Home Price Indices are the leading measures of U.S. residential real estate prices, tracking changes in the value of residential real estate. The index is made up of measures of real estate prices in 20 cities and weighted to produce the index.

The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

Google Finance is the source for any reference to the performance of an index between two specific periods.

Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

Past performance does not guarantee future results.

You cannot invest directly in an index.

Consult your financial professional before making any investment decision.

Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors.

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  1. http://finance.yahoo.com
    http://finance.yahoo.com
    http://finance.yahoo.com
  2. http://www.zacks.com/commentary
  3. http://www.foxbusiness.com/economy-policy
  4. http://www.foxbusiness.com/economy-policy
  5. http://www.foxbusiness.com/markets
  6. http://www.foxbusiness.com/economy-policy
  7. http://www.foxbusiness.com/economy-policy
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