Jobs Data, Q2 Earnings Stay Impressive - Ahead of Wall Street

Positive news out of China and Europe and the reassuring picture emerging from the Q2 earnings season will likely help maintain the stock market's momentum. The big drop in initial Jobless Claims and expectations of improved housing numbers a little later only add to the favorable backdrop.

The HSBC Bank's preliminary or flash manufacturing sector PMI for July came in above ‘50' marker for the second month in a row, reaching 52 vs. 50.7 in June. The gain in this PMI reading is particularly notable as this survey is weighted towards small and medium sized businesses that are mostly in the private sector versus the mostly state-owned large enterprises that get tracked in the official PMI survey. The improvement is likely a reflection of the government's mini-stimulus measure unveiled some time back to prop up the country's growth profile.

The apparent success of the government stimulus initiatives, as reflected in the improving PMI trend over the last two months, would limit the odds of anything more on the horizon. But it's probably better to have sustained underlying momentum in the economy than keep looking up to the government. The good news out of China was complemented by strong data out of Europe as well, with the region's composite PMIs for July coming in better than expected.

Today's domestic and international economic data is important, but the market's attention is solely on the Q2 earnings picture. The reporting cycle really goes into overdrive today with almost 10% of the S&P 500 members reporting results. Including this morning's reports from Caterpillar CAT, Ford F, GM GM, 3M MMM and others, we now have Q2 results from 202 S&P 500 members that account for 53% of the index's total market capitalization.

Total earnings for these 202 companies are up +9.7% from the same period last year on +3.6% higher revenues, with 68.8% beating EPS estimates and 52.4% coming out with positive revenue surprises.

This is better performance than we have seen at this stage in other recent reporting cycles -- the growth rates are better, more companies are coming ahead of estimates, and there is even some modest improvement on the guidance front. The sum total of this is starting to have a bearing on estimates for the current period (2014 Q3).

By this time in other recent reporting cycles, we would have started seeing estimates for the current period come down. But we aren't seeing that at present. We probably shouldn't jump the gun at this surprisingly favorable turn of events, but it nevertheless is a positive development if sustained through the next couple of weeks.

Sheraz Mian
Director of Research