MARKETS SPECTATOR: The states of uncertainty

US markets are set to be in a holding pattern for some time in the wake of Hurricane Sandy and also as the realisation that US revenue growth is in reverse hits home.

When the wrath of Hurricane Sandy eases, not only will markets have to deal with the astronomical repair bill but the reality that there’s still nearly 50 per cent of S&P 500 companies still to report third quarter earnings.

And the trend, if last week is anything to go by, isn’t good. The broad metric of "number of S&P 500 companies to beat estimates" masks the true story, too. So far, of the 272 S&P 500 companies that have reported third quarter earnings, 60.7 per cent have beaten estimates, which is almost smack bang in line with the 63 per cent average of the last 10 years.

However, when you delve a little deeper one can easily see why bears have been in control the last few weeks.

Source – Bespoke Investment Group


Source – Bespoke Investment Group

The first problem has been the dire performance to date of third quarter revenues, with only 44.8 per cent of companies reporting better-than-expected top line growth. Whilst the market was expecting a weak quarterly earnings season, the performance of revenues has been particularly worrying for markets.

It tells the market that the business is really only making more money through cost cutting or other short term means, which is unsustainable in the medium to longer-term given how much streamlining has occurred over recent years. On top of this, outlook guidance for the months ahead have been particularly weak, too.

So, with so much uncertainty due in the coming weeks, it’s going to be very hard for markets to push higher. The likely scenario is that markets go into a holding pattern, trading sideways until some certainty returns to the market.

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