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Earnings Continue to Disappoint; GDP Better than Expected

Market Digest – Week Ending 10/26

Earnings season continued to disappoint. Apple, Caterpillar, DuPont and 3M led the list of companies failing to match estimates. Stocks fell. So far, about 70% of S&P 500 companies reporting have beat earnings estimates, but an alarming 60% have missed sales projections. GDP growth for the third quarter was reported at 2.0%, modestly ahead of most expectations. Treasuries rose. Oil prices fell nearly 5%.

Weekly Returns

S&P 500: 1,412 (-1.5%)

MSCI EAFE: (-0.9%)

US 10 Year Treasury Yield: 1.75% (-0.1%)

Gold: $1,711 (-0.6%)

USD/EUR: $1.294 (-0.7%)

Major Events

  • Monday – Caterpillar reported a 49% profit increase but lowered expectations for full year sales and profits.
  • Monday – Japan reported a 10.3% drop in September exports, compared to last year. A strong Yen and a dispute with China over islands in the East China Sea were cited.
  • Tuesday – Apple unveiled the iPad mini, priced starting at $329, above rival products from Google and Amazon.
  • Tuesday – DuPont and 3M each reported earnings below expectations and guided down future outlook.
  • Wednesday – Facebook shares rose 19% after reporting strong revenue and progress on making money with mobile ads.
  • Wednesday – The Fed made a statement reiterating its belief that the US economy is growing slowly and that its current stimulus plans remain appropriate.
  • Thursday – Apple reported earnings per share up 24%, but below most expectations. iPhone results were strong while iPad sales disappointed.
  • Friday – US GDP growth for Q3 was reported at 2.0%. The number was higher than expected, driven by consumer and government spending.
  • Friday – Spain’s jobless rate tops 25%.
  • Friday – Microsoft released its Surface tablet and Windows 8 operating software.

Our Take

Unfortunately, last week’s soft patch in tech earnings carried on this week at some of the major industrial companies. Companies like Caterpillar and DuPont are better indicators of the general economy than the tech sector, so the reduced outlook from their respective CEO’s is significant.

The first estimate of Q3 GDP was released this week at 2%, an uninspiring number but better than was expected. Obama is claiming it a victory while Romney is, unsurprisingly, calling it an indication of failure. In reality, it is neither.

Globally, the news was worse. A sharp drop in Japanese exports means the country is more than likely headed back to shallow recession territory. It’s also an indication that China will struggle to maneuver a “soft landing”.  Things in Spain continue to deteriorate, with unemployment passing 25%. The good news for Spain and Greece is things should start to improve relatively soon. They can’t get much worse. The bad news is the initial improvement from such an undesirable scenario still leaves them in a bad place. Meanwhile a huge portion of their labor pools sit idle, watching their skills deteriorate.

At some point, we still believe economic growth globally should start to accelerate in impressive fashion. But it doesn’t look like it will be in 2012.

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

Craig Birk leads the Personal Capital Advisors Investment Committee and serves as Chief Investment Officer. His focus is translating improvements in technology into better financial lives. Craig has been widely quoted in the Wall Street Journal, Bloomberg, CNN Money, the Washington Post and elsewhere. Prior to Personal Capital Advisors, he was a leader within the portfolio management team at Fisher Investments, helping assets under management grow from $1.5 billion to over $40 billion. Craig graduated from the University of California at San Diego and has earned the Certified Financial Planner® designation.
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