S&P said last week the impact of the budget impasse had shaved at least 0.6 percent off fourth-quarter growth, taking $24 billion out of the economy. The ratings agency forecast 2 percent annualized growth, down from the 3 percent seen last month. Fitch Ratings put the government of the world’s biggest economy on watch for a possible credit downgrade.
“After this drama with this past shutdown is over, people will have to focus on fundamentals, and that’s earnings, holiday sales and the impact of the debt negotiations on the economy,” Matt McCormick, who helps oversee $10.1 billion as a portfolio manager at Cincinnati, Ohio-based Bahl & Gaynor Inc., said by phone Oct. 16. “All of that is going to be less than stellar.”
Profit Growth
While profit growth has slowed, the S&P 500’s valuation is in line with the historical average. The S&P 500 trades at 16.8 times earnings, compared with the 10-year average of 16.3, data compiled by Bloomberg show. After this year, companies will resume their profit expansion, with S&P 500 earnings forecast to increase more than 10 percent in 2014 and in 2015, according to analyst estimates.
Alcoa Inc., which beat analyst profit estimates for the third quarter, is up 6.3 percent in October, after the last four months’ performance mirrored ETF flows. The largest U.S. aluminum producer rallied 5.5 percent in September, dropped 3.1 percent in August and gained 1.7 percent in July. In June, the shares fell 8 percent.
Regeneron Pharmaceuticals
Shares of Regeneron Pharmaceuticals Inc., the maker of the eye medicine Eylea, have risen and fallen in the same months flows have gone in and out of ETFs. It led the S&P 500 higher last month, rising 29 percent, after a 10 percent drop in August and a 20 percent gain in July. Analysts project the Tarrytown, New York-based company will boost earnings 57 percent this year and another 29 percent in 2014, data compiled by Bloomberg show.
Morgan Stanley has advanced 10 percent in October. The owner of the world’s biggest retail brokerage posted earnings that exceeded the average analyst estimate and is forecast to increase them another 36 percent next year. The shares had risen and fallen in line with the pattern of ETF flows since June.
Of the 100 S&P 500 companies that have posted earnings so far this reporting season, 70 have surpassed the projections of analysts, data compiled by Bloomberg show. The S&P 500 is up 5.4 percent since Oct. 8, when Alcoa was the first company in the index to report.
“The stock market fooled the hand wringers yet again,” said Howard Ward, the chief investment officer for growth equity at Rye, New York-based Gamco Investors Inc., which oversees about $40 billion. “Now that we have at least a temporary deal in Washington, I suspect this will push some ETF money, or market-timing money, in the direction of stocks.”