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FactSet StreetAccount Summary - US Weekly Recap: US Weekly Recap: Dow (2.86%), S&P (2.21%), Nasdaq (2.33%), Russell 2000 (3.24%)

Jul 24, 2015
Overview:
    • US equities finished lower this week. There was no specific driver behind the pullback. However, there were some thoughts that the recent bounce on dampened Grexit fears and the stabilization in China stocks may have been overdone. Most of the focus was on earnings. Beat rates remained strong, but this was not surprising given the low bar and continued cushion from cost cutting and buybacks. At the same time, top-line trends remained sluggish and macro commentary seemed relatively little changed from last quarter. While takeaways were mixed and the sentiment/positioning dynamic continued to play a big role in post-earnings performance, there were a few themes that stood out. Industrial results and guidance tended to be poorly received, while most semiconductor names provided softer-than-expected September quarter outlooks. Restructuring also received a lot of attention. It was a much quieter week in terms of macro headlines. However, some renewed growth fears surrounding China fit with another big selloff in the commodity complex. This helped drive a sharp pullback in the materials sector, while energy and industrials also came under outsized pressure. The consumer sectors held up better, but still ended down for the week.
Better earnings metrics not enough:
    • This week saw some improvement in a number of key earnings metrics. According to the latest Earnings Insight report from FactSet, the blended growth rate for Q2 S&P 500 EPS improved to (2.2%) from (3.7%) at the end of last week and the (4.5%) expected at the end of the quarter. In addition, of the 187 companies that have now reported results, 76% have beat consensus EPS estimates, ahead of the one-year average of 74%. In the aggregate, companies are reporting results that are 4.6% above expectations, just ahead of the 4.5% one-year average positive surprise rate. Better earnings metrics were unable to provide any meaningful broader market support this week. This was largely a function of widespread thoughts that the bar had been sufficiently lowered to drive upside, particularly in combination with the ongoing cost-cutting push across a broad range of industries. In addition, top-line trends continued to look sluggish with the blended growth rate for Q2 revenue unchanged at (4.0%). The percentage of companies beating consensus revenue expectations slipped to 54% from 56%, below the 57% one-year average. Finally, the positive surprise rate declined to 0.3% from 0.9%, which also represents the one-year average.
Industrial earnings disappoint:
    • Despite the depressed expectations heading into earnings season, there were a number of notable earnings/guidance disappointments from the industrial space this week. A soft macro backdrop, the spillover from weak energy markets, the ongoing slowdown in China and emerging markets, sluggish capex and FX remained among the higher-profile headwinds. CAT (8.5%) reset its 2015 revenue guidance, while macro commentary was largely downbeat and the Street remained concerned about visibility and a lower earnings trajectory into 2016. UTX (10.3%) lowered its 2015 operating EPS guidance by ~3% and guided organic sales growth to the low end of its prior 3-5% range. The revision was to account for a softer aerospace aftermarket and weaker-than-expected China Otis outlook and lower European elevator service revenue. MMM (4.7%) also reduced its 2015 EPS and organic growth guidance on weaker global macro and lackluster consumer demand in Electronics and Energy. URI (20.4%) was one of the worst performers this week after a much more aggressive than expected guidance reset, with weak oil and gas markets not surprisingly the big driver.
Semis guide down:
    • The semiconductor group underperformed this week with the SOX (3.7%). Selling pressure was driven by some heightened scrutiny surrounding the view that the industry has become much less cyclical. Much of the focus was on LLTC (7.7%), which is seen as somewhat of a bellwether given its end-market diversity and short lead times. It guided September quarter revenue down 7-12% sequentially, while consensus expectations were for a 2% increase (in line with normal seasonality). It cited difficult macro conditions, outsized pressure on its key Industrial segment and noted that bookings slowed through the quarter across all major markets and regions. However, it also expressed optimism that the cycle will be short and pointed to some improvement in the early weeks of the current quarter. While a number of other semi companies guided lower this week, the trends they highlighted were not as bad as LLTC made things sound. Guidance from TXN (0.7%) was nearly 5% below the Street, though the midpoint was still up 1.5% q/q. In addition, it said that orders improved in both the months of May and June, allowing it to exit the quarter with a book to bill of just over 1.0.
More restructuring:
    • Restructuring to cut costs and right-size macro-challenged business models has remained a big theme this earnings season, both in terms of traction (or lack thereof) surrounding existing efforts and new program announcements. There were several higher-profile announcements this week, though they were not always the key driver of post-earnings performance. EMC +1.4% seemed to be one of the bigger beneficiaries of the restructuring dynamic. It announced an $850M restructuring plan that helped the stock outperform following earnings (on a weak day for tech) despite another downward revision to guidance. MXIM +6.2% was another standout on the back of a new plan to generate $180M in annual cost savings, partly via a shift to a fab-lite model. Elsewhere in the semi space, QCOM (4.2%) unveiled an activist-driven plan targeting ~$1.1B in annual cost reductions and a strategic review. However, this was overshadowed by another guidance cut. With what it described as an “industry reset” in Valves & Controls, PNR (4.7%) said it identified new actions that should help generate ~$135M in savings, up from $60M. In the face of headwinds from weak oil, WFT +4.7% announced an additional 1K layoffs, bringing the total to 11K in 2015.
China and commodity weakness:
    • While it was a quiet week of macro headlines, two related themes stood out with renewed concerns about a slowdown in China and the selloff in the commodity complex. In terms of the former, the July flash manufacturing PMI fell to a 15-month low, contrasting with the signs of stabilization seen in the June activity and monetary data. Commodities came under pressure with a number of moving parts in focus. These included the ongoing policy divergence theme and skepticism about China stabilization that was in play even before Friday’s weak manufacturing PMI print. This seemed to be best reflected by the weakness in the metals group, particularly copper (which lost ~4.6%). Goldman Sachs was out with a very negative call on copper this week. It substantially lowered its medium to long-term price forecasts, noting that a combination of divergence, deflation and deleveraging will put significant downward pressure on Chinese demand growth and global production costs. The lower cost curve dynamic also received some attention as bearish inventory and rig data drove a 6% selloff in WTI crude.
Materials lead market lower, consumer stocks hold up best:
    • The materials sector sold off with the sharp pullbacks in industrial and precious metals stocks. Notable decliners included FCX (22.6%), ABX (17.5%), NEM (14%), AKS (12.8%) and BHP (8.2%). Energy was hit as oil weakness overshadowed some of the better takeaways from results out of the oil services sector. E&Ps fared the worst with the EPX (8.4%). Machinery and multis were among the worst performers in the industrials sector. Another sharp pullback in JOY (12.4%) left the stock down 31% in just the last month. Healthcare lagged with managed care hit despite more M&A. A guidance cut from BIIB (25.9%) was another headwind. Tech underperformed on the semi selloff, though disappointing results/guidance from AAPL (4%) also weighed and GOOG (7.3%) gave back some of last week’s ~27% rally. Financials held up better as earnings sentiment surrounding the banks remained upbeat. The consumer sectors fared the best the week, though both discretionary and staples still finished lower. Some of the support for the former came from a strong Q2 out of AMZN +9.6%.
Sector Performance:
    • Outperformers: Consumer Disc. (0.46%), Consumer Spls. (0.92%), Financials (1.01%)
    • Underperformers: Materials (5.47%), Energy (4.07%), Industrials (3.81%), Telecom (3.04%), Healthcare (2.76%), Tech (2.45%), Utilities (2.37%) 

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