Pro Perspectives 9/30/19

September 30, 2019

We end the quarter today.  In the coming weeks, we'll see Q3 earnings.  What should we expect?

As we discussed last week, estimates have already been ratcheted down.  Wall Street is looking for earnings to contract of 3.8% from the same period a year ago.

That seems to fit the recession narrative we've been hearing.  But is it warranted, or is it Wall Street and corporate America taking advantage of the fear in the air, to set the bar low?

Let's take a look at the third quarter.

First, take a look at Citigroup's Economic Surprise Index.  In the chart below, above the zero line is the degree to which the data is coming in above expectations.     

You can see, the positive surprises have been coming in hot over the past month, and the index itself has been on the rise throughout the third quarter.  This suprise index behavior typically drives multiple expansion (in stocks) and higher yields.  That doesn't fit with the earnings expectations/ recession story. 

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And it doesn't fit with the Atlanta Fed's forecast for Q3 GDP, which has been on the rise too. 

And don't forget, in the quarter, we had two Fed rate cuts, and the Fed's retreat from its Quantitative Tightening program.  That has driven the benchmark 10-year yield down from 2.05% to 1.67% in the quarter (cheaper money), and it stabilized stocks near the record highs (fuel for consumer confidence).

Bottom line:  The earnings bar has been set low, so that it can be beat.  That's the way Wall Street works.  So, positive earnings suprises should further underpin stocks as we head into Q4.