The Federal Reserve meeting next week is not on the minds of as many people as when it met in September, but its decision to do nothing last month is providing the fuel for more share gains in Apple and Facebook, which report results next week.
Facebook is only slightly off an all-time high, and Apple has recovered somewhat from losses earlier in the year after investors have poured money back into stocks, bringing the S&P to successive records that some say may not be supported by corporate results.
The numbers from Facebook (FB.O) and Apple (AAPL.O) are among those that will be closely watched – and investors say at their current levels, the margin for error is slim.
Nearly half of the S&P 500 companies have reported their third-quarter results so far, and 69 percent have beaten Thomson Reuters I/B/E/S estimates. The technology sector has led the way, beating expectations 84 percent of the time. The most recent companies to do so were Amazon.com (AMZN.O) and Microsoft (MSFT.O), whose results led the S&P to close at an all-time high of 1,759.79 on Friday.
Companies already stretched to high price-to-earnings multiples, like Facebook, will have to outpace expectations to keep investors buying.
“There is not a lot of room for error, especially with these names with a lot of momentum behind them. You have to beat the numbers pretty handily,” said Daniel Morgan, vice president and senior portfolio manager at Synovus Trust Company in Atlanta, who focuses on tech stocks.
That’s where the Fed comes in. Some of the riskier names and high-dividend payers had pulled back in the late summer, anticipating the Fed would begin reducing monthly bond purchases beginning at its September meeting.
But that didn’t happen – and since then, stocks have been unimpeded, save for the 16-day government shutdown that didn’t scare too many people.
The Federal Reserve will hold its October meeting on Tuesday and Wednesday. But earnings will overshadow the central bank, as it is expected to maintain its current policy, in part because of the economic hit that resulted from the shutdown.
“So far, this earnings season has been pretty balanced and on the positive side,” said Paul Mangus, head of equity strategy and research for Wells Fargo Private Bank in Charlotte, N.C. “If that continues into next week, and we’re not expecting anything surprising out of the Fed, it could continue to support markets on current levels.”
Mangus noted that expectations for the third quarter were low, so beating earnings estimates is not a particularly bold sign of strength. Many companies were able to create earnings without actual revenue growth, so 46 percent of results so far revealed lower-than-expected revenue growth.
“The sales numbers have been anemic. We’re pretty flat in terms of across the board revenue,” Mangus said.
For the past week, the Dow was up 1.1 percent, the S&P rose 0.9 percent and the Nasdaq gained 0.7 percent.
TECH: A BIG ACT TO FOLLOW
About 24 percent of S&P 500 companies will report their third-quarter earnings next week, among them heavy hitters such as General Motors (GM.N) and Visa (V.N).
But Apple, reporting on Monday, and Facebook, on Wednesday, are likely to be the most-watched names.
“These are big names that people like to look at and they create a feeling about the market,” said Synovus Trust’s Morgan.
He said he will be looking to see if Apple has reversed the negative trend in iPad sales of the second quarter. But, he noted, Apple’s multiple is low, at a 12.25 price-to-earnings forward ratio, compared with Facebook, which has a 55.45 P/E multiple.
Right now, the market is optimistic, particularly for Facebook options. That market is pricing in more upside risk than downside risk for Facebook shares heading into earnings next week. A metric known as skew, which measures the perceived volatility priced into out-of-the-money puts versus out-of-the-money calls on a stock, is inverted – meaning it costs more for options that anticipate upside rather than downside.
“This is the opposite of what we typically see in the stock market, since most investors are long stocks and therefore more concerned about downside risk,” said Matt Franz, at Stutland Volatility Group in Chicago.
ENERGY TURNS UP THE HEAT
Second only to technology, the energy sector of the S&P 500 has beaten analysts’ earnings expectations in 73 percent of the results reported so far. The focus will stay on the group next week, with results from Exxon (XOM.N) , Chevron (CVX.N) and Valero (VLO.N).
As a cyclical sector tied to the pace of economic growth, “better earnings and especially better guidance … are going to say good things about the economy going forward,” said Tom Schrader, managing director of U.S. trading at Stifel Nicolaus Capital Markets, who focuses on energy stocks.
Forward guidance from refiners may be positive if companies price in news that the U.S. Environmental Protection Agency is considering lowering the required amount of ethanol to be blended into engine fuels, said Schrader.
If the government’s September jobs number was any indication, economic data that is relatively within expectations, even if weak, will fuel investor confidence that the Federal Reserve will keep stimulating the economy at current levels.
ADP’s national employment report, due on Wednesday, will show the number of non-farm private sector jobs added to payrolls in October. Unlike the Department of Labor’s October jobs report, ADP will not account for public sector jobs that were temporarily lost during the partial government shutdown. If it did, that might present a clearer picture of the nation’s employment rate.
The Conference Board’s Consumer Confidence Index, to be released on Tuesday, will account for the government shutdown and reveal how big a hit U.S. spending habits took as a result.
Source : Reuters