Earnings for S&P 500 companies grew by 25.8% in the third quarter, the strongest performance since the third quarter of 2010, when companies benefited from very attractive, recession-era comparable earnings.
Nevertheless, from the start of earnings season to the close of trade Friday, the S&P 500 index SPX, +0.22% has fallen 2.7%, the Dow Jones Industrial Average DJIA, +0.49% 1.1%, and the Nasdaq Composite Index COMP, -0.15% 5.5%.
“Third quarter earnings were outstanding both on earnings and revenue growth, the percentage of companies beating expectations, and the magnitude of those beats,” Michael Arone, chief investment strategist at State Street Global Advisors, told MarketWatch.
But the selloff that accompanied these announcements is a testament to the fact that “Wall Street doesn’t care what you’ve done in the past. It’s all about what you’re going to do next quarter,” Arone said.
The pairing of rosy earnings announcements and stock market declines can be explained by several big name companies issuing cautious guidance going into the fourth quarter, Tom Essaye, president of the Sevens Report, told MarketWatch.
“The market doesn’t even need most companies to issue weak guidance to trigger a selloff in this environment,” Essaye told MarketWatch. “It’s the top hundred most widely held companies that mostly drive markets.”
Essaye points to Caterpillar Inc.’s CAT, +0.42% earnings as a microcosm of the market overall. The company beat expectations on earnings and revenue, but it’s guidance indicated that the construction-equipment manufacturer is already experiencing rising input costs as a result of new tariffs on steel and other products. Shares fell nearly 13% following its earnings release before subsequently recovering.
“These sorts of details play into existing fears in the market about rising costs and tariffs, which will more than double in January,” if U.S. and Chinese officials can’t strike a trade deal before the end of the year, Essaye said.
Another bellwether firm that issued disappointing guidance was Apple Inc., AAPL, +1.11% which decided to cease reporting the number of iPhones and other products it sells, leading BMO Capital Markets analyst Tim Long to lament that the “lack of transparency is disappointing, and will likely limit investor’s visibility into the company. He continued, “Our view remains that units may not grow at all going forward.” Apple shares are off 11.6% since the end of October.
Even more worrying is the guidance being reported by Apple suppliers. AMS AG, AMS, -5.40% Lumentum Holdings Inc, LITE, +1.07% and Qorvo Inc. QRVO, +1.78% all warned of lower than expected sales this week, feeding into the negative sentiment toward America’s most valuable company in particular and the tech sector in general.
These stocks were joined by a diverse set of companies from 3M Co. MMM, +2.00% to Qualcomm Inc., QCOM, +0.88% which spooked investors with less-than-encouraging outlooks.
Macro headwinds, including trade tensions, rising interest rates, a stronger dollar, and slowing growth abroad have also helped to trigger a pivot towards negative sentiment in the market. “This is where peak earnings growth comes in,” Essaye said, arguing that the stock market has been supported this year by two pillars: strong economic growth and strong earnings growth.
“The market knows that earnings growth has peaked, and so earnings growth can’t be a reason any longer to ignore the macro picture,” he said.
The evidence of this fallen pillar can be seen in the performance of the major indexes in the past week, where volatility reigned supreme while stocks ground lower. The Dow fell 2.2% over the past five trading days, while the S&P took a 1.6% hit, and the Nasdaq fell 2.2%.
With 93% of S&P firms having reported earnings for the third quarter, according to FactSet, investors minds will be laser-focused on looming macro threats, as well as economic data and comments from Federal Reserve officials.
While U.S. markets will be closed Thursday for the Thanksgiving Day holiday, there will be much data for investors to digest in the week ahead, starting with the National Association of Home Builders Index on Monday at 8:30 a.m. Later that day Federal Open Market Committee member and New York Fed President John Williams will participate in a moderated question-and-answer session in New York.
Tuesday will bring data on both new building permits and housing starts, further informing investors on the state of one of the U.S. economy’s most depleted sectors. Wednesday will feature several major reports, including data on durable orders, initial jobless claims, the Conference Board’s Index of Leading Economic Indicators, and the University of Michigan’s consumer sentiment gauge.
On Friday, Markit will give investors a look at the state of both the manufacturing and services sectors, with preliminary readings of both Purchasing Managers Indexes. And, of course, the day after Thanksgiving will also be Black Friday, launching the holiday shopping season that can make or break U.S. retailers.
