Market Spooked By Disappointing Earnings
Halloween is right around the corner. It’s the favorite day of the year for millions of American children. They get to dress up in scary costumes and go door-to-door collecting candy from their neighbors.
But for the stock market, Halloween came early this year.
On Friday, the ghosts of stock market crashes past spooked investors and sent stocks tumbling. The Dow Jones Industrials plunged 205 points to close at 13,343.
What happened?
Friday marked the 25th anniversary of Black Monday. In case you forgot, Black Monday is the name given to October 19, 1987, the day the Dow plunged 508 points or 22.6%.
It was and still is the largest one-day percentage decline in the storied 116-year old stock market index.
The Dow’s decline this past Friday came on the heels of disappointing third quarter earnings from a few of the biggest and most influential American companies.
General Electric (GE) managed to beat analysts’ estimates by a penny, but revenue fell short of expectations. As a result, shares of the $229 billion conglomerate fell 3.4% to close at $21.70.
McDonald’s (MCD) gave investors a fright by reporting their slowest quarterly sales growth in nine years. Sales at the burger chain’s restaurants open at least 13 months increased by just 1.9%. It was the first gain of less than 2% since the June quarter of 2003.
To make matters worse, net income dropped 3.5% to $1.46 billion. And earnings of $1.43 per share missed analysts’ estimates by 4 cents. MCD gave up over $4 per share or 4.5% on the news.
Not even mighty Microsoft (MSFT) could buck the trend.
The software giant said on Thursday night quarterly sales fell 8% to just over $16 billion on sluggish demand for personal computers. It also reported earnings plummeted by 22% to $0.53 per share. Both numbers missed estimates, and MSFT declined by nearly 3% on Friday as a result.
I know it sounds bad… but don’t panic!
Despite these disappointing results from bellwether companies, third quarter earnings season hasn’t been as bad as many had feared. According to Bloomberg, a hefty 69% of the 117 S&P 500 companies reporting so far have beaten analysts’ estimates.
What’s more, analysts are becoming more optimistic as we make our way through earnings season.
Back in late September, forecasts were for a 2% decline in S&P 500 earnings for the fall quarter. Today, analysts are projecting earnings will slip by just a meager 0.3%.
That’s great news for investors.
Since the market began trending higher in 2009, the key driver has been steadily rising corporate profits. If the current rally – which has taken the market indices to their highest levels in nearly five years – is to continue, we can’t have the bottom dropping out of earnings.
The rising optimism amongst Wall Street analysts is encouraging. It’s a good sign that third quarter weakness is just a slight misstep in an otherwise steady upward climb.
And don’t forget, the Fed’s recently announced QE3 is a bullish catalyst for stocks.
There’s no question, this earnings season has been a bit scary for investors. But hopefully, QE3 will be for investors like Halloween candy is for America’s trick-or-treaters.
Profitably Yours,
Robert Morris
Category: Stocks
