Stocks to Sustain Momentum - Ahead of Wall Street

Stocks appear on track to sustain the positive momentum from the last two days in today's session as well. The Fed drove stocks higher with its ‘patient' posture and investors now expect the European Central Bank (ECB) to follow the Fed's lead in the New Year.

The ECB is already doing a number of things in that respect, ranging from rate cuts to purchases of asset-backed securities. But they have yet to do large-scale purchases of government bonds, which the markets expect them to start early next year following statements from many ECB officials, particularly President Mario Draghi. Today's positive sentiment follows favorable comments by an ECB board member in a Wall Street Journal interview.

European interest rates indicate that the markets have priced in a full-fledged ECB QE program early next year. These expectations notwithstanding, the ECB has failed thus far to create consensus on the issue.

Germany in particular remains opposed to purchases of government bonds. In fact, the Bundesbank president recently came out explicitly disputing the imminence of deflation risk to the currency union and the need to do anything to counter it. It seems that Draghi is using the force of market expectations to influence German behavior. But the markets may be vulnerable to a major disappointment in the not-too-distant future if Germany holds their ground.

In corporate news, Nike (NKE) came out with a  weak outlook for the current period in its earnings report after the close on Thursday. Red Hat (RHT), on the other hand, came out with better-than-expected results. These results and the same from others in recent days are for these companies' fiscal quarters ending in November; we do count these reports as part of our December quarter earnings tally. As such, one could say that we have started seeing the early Q4 results already. That said, the reporting cycle will really get going only around mid-January.

Overall estimates for Q4 have come down over the last two months, with negative guidance from companies prompting analysts to cut their estimates. Total earnings for the S&P 500 are expected to be up +2.2% from the same period last year, which is down from the +9.6% growth that was expected at the start of the quarter in early October.

Estimates have been coming down for more than two years now, though the magnitude of negative revisions for Q4 is the highest that we have seen for any other recent quarter. Falling estimates for the energy sector as a result of the oil price decline are a big contributor to the outsized negative revisions for the current period.

Sheraz Mian
Director of Research