Will Earnings Finally Matter?

In recent years, global stock markets have sliced and diced every word from the Federal Reserve as quantitative easing has been the major market driver of financial markets. Now as quantitative easing appears to be nearing an end, earnings reports are becoming more important again as fundamentals come back into play.

We’re currently in the middle of earnings season for the second quarter and on Friday, July 19, 2013, FactSet.com reported that 104 S&P 500 companies had reported their quarterly earnings. Of those, 72 percent reported earnings above the mean estimate and 50 percent reported revenues above the mean estimate.

During the past week, a number of companies actually saw their share prices decline after earnings or revenue expectations were missed. Let’s take a look at what happened and what we might expect ahead:

The week began with Monday’s earnings report from the controversial Halliburton Corporation (HAL). The company reported earnings of 73 cents per share on revenue of $7.32 billion, beating estimates of 72 cents per share on revenue of $7.29 billion.

Toilet maker, Crane Company (CR) reported earnings of $1.06 per share, beating estimates of $1.04 per share, although its reported revenue of $648 million got flushed by estimates of $664 million.

McDonald’s (MCD) reported earnings of $1.38 per share on revenue of $7.08 billion, missing estimates of $1.40 per share on revenue of $7.10 billion.

On Tuesday, July 23 Travelers Insurance (TRV) received quite a bit of attention before the opening bell. The company reported earnings of $2.13 per share on revenue of $6.67 billion, beating estimates of $1.59 per share on revenue of $5.97 billion.

Netflix (NFLX) reported earnings of 49 cents per share on revenue of $1.07 billion, beating estimates of 40 cents per share on revenue of $1.07 billion.

Apple (AAPL) reported earnings of $7.47 per share on revenue of $35.3 billion, beating estimates of $7.29 per share on revenue of $34.9 billion.

DuPont (DD) reported earnings of $1.28 per share, beating estimates of $1.27 per share although its revenue $9.84 billion missed estimates of $10.01 billion.

United Parcel Service (UPS) reported earnings of $1.13 per share, in line with estimates of $1.13 per share although its revenue $13.51 billion missed estimates of $13.59 billion.

On Wednesday, July 24, Caterpillar (CAT) caught the spotlight because its earnings miss was seen as a disappointing barometer reading on the state of the global economy – and in particular – China’s economy. The company reported earnings of $1.45 per share on revenue of $14.62 billion, missing estimates of $1.70 per share on revenue of $13.71 billion.

Ford (F) reported earnings of 45 cents per share on revenue of $38.1 billion, beating estimates of 37 cents per share on revenue of $34.9 billion.

Boeing (BA) reported earnings of $1.67 per share on revenue of $21.82 billion, beating estimates of $1.58 per share on revenue of $20.7 billion.

Eli Lilly (LLY) reported earnings of $1.16 per share on revenue of $5.93 billion, beating estimates of $1.01 per share on revenue of $5.82 billion.

On Thursday, July 25, Facebook (FB) stole the show after the company reported earnings of 13 cents per share, beating estimates of EPS expectations of 9 cents. A 29.61 percent gain brought its closing price to $34.36 per share, which was only 9.57 percent below its Initial Purchase Offering of $38 per share.

McKesson (MCK) missed estimates with reported earnings of $2.07 per share, beating expectations of $1.70 per share, although the company’s revenue of $32.2 billion fell short of the expected $32.6 billion.

Starbucks (SBUX) reported earnings of 55 cents per share on revenue of $3.74 billion, beating estimates of 53 cents per share on revenue of $3.72 billion.

Amazon (AMZN) missed estimates as it reported a loss of 2 cents per share on revenue of $15.7 billion. Expected earnings were 5 cents per share on revenue of $15.7 billion.

McGraw Hill Financial (MHFI) reported earnings of 92 cents per share on revenue of $1.25 billion, beating estimates of 82 cents per share on revenue of $1.19 billion.

General Dynamics (GD) reported earnings of $1.81 per share on revenue of $7.91 billion, beating estimates of $1.62 per share on revenue of $7.72 billion.

Sirius XM (SIRI) reported earnings of 2 cents per share on revenue of $940 million, beating estimates of 2 cents per share on revenue of $935 million.

Dow Chemical (DOW) reported earnings of 64 cents per share on revenue of $14.58 billion, beating estimates of 62 cents per share on revenue of $14.46 billion.

Qualcomm (QCOM) reported earnings of $1.03 per share on revenue of $6.24 billion, beating estimates of 91 cents per share on revenue of $6.05 billion.

Regarding sectors and ETFs, information and technology (QQQ) have been weak with Microsoft (MSFT) and Google (GOOG) disappointing while Apple surprised to the high side. The top performing sectors are Financials, (XLF) Health Care, (XLV) Industrials (XLI) and Aerospace and Defense. (ITA) while weakest sectors are Materials, (XLB) and Utilities.(XLU)

In the sector chart below, we can see how the various sectors have performed relative to the S&P 500 over the past 30 days, with five performing better than the broad average and four under performing.

Bottom line: With more earnings reports scheduled for this week, investors will be watching to see what their impact will be and if, indeed, fundamentals will again begin to be a factor in stock market moves. Strong sectors tend to remain strong and so, for today, financial and health care ETFs look like the best place to be.

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