Strong earnings outweigh macro concern

By Gareth Watson | April 27, 2012 | Last updated on April 27, 2012
6 min read

Apple, downgrades, GDP and FOMC – The four things that can basically sum up this week. The good news is that the markets rewarded news from Apple and the FOMC, while overlooking the negative news resulting from downgrades and GDP figures.

First up was Apple which blew away analyst estimates with its quarterly earnings report. We focus on Apple due to the magnitude of the earnings “beat”, but we’d note that the Apple story in general also represents those companies that have reported earnings that were clearly better than expected. So far, it’s evident that corporate earnings have been very strong for the first quarter.

Next up was Ben Bernanke and the Federal Reserve which held its regular Open Markets Committee meeting. To be blunt, the meeting revealed nothing new, but it did convince many investors that the likelihood for further quantitative easing in the U.S. is much stronger today than it was at the beginning of the year. As such, we saw the U.S. dollar come under some pressure while oil and gold prices added some marginal strength.

We saw downgrades this week for Ontario and Spain (who would have thought we’d see these two places side by side). But don’t worry, Ontario is not even close to being in the same fiscal position as Spain at the moment. To put things into perspective, you’re seeing drastic austerity measures in Spain which registered an unemployment rate of 24.4% this morning; therefore, Ontario’s position is far better than that of Spain. Nevertheless, Standard & Poor’s put a negative outlook on its credit rating for Ontario, while Moody’s actually lowered its rating on the province from Aa2 to Aa1. As for Spain, S&P decided to downgrade its sovereign debt two notches from “A” to “BBB+”. Considering the difficulty Spain is in, this is unlikely the last downgrade for that country from any of the rating agencies.

Finally GDP. In the U.K., quarterly GDP figures confirmed that country is in a technical double dip recession while the 2.2% Q1 growth figure in the U.S. fell short of the 2.5% projected by economists. Even so, U.S. equity markets moved higher after the announcement as focus was likely still on positive earnings and the improved prospects for further quantitative easing.


The “nay sayers” were out in full force in the week leading up to Apple’s quarterly results release on Tuesday evening, driving the stock price lower by about US$50 per share. They said that sales momentum was going to decline, they said that numbers were only going to meet and not beat expectations, and they said that not having Steve Jobs around to help innovate the “next big thing” would catch up with the company. While the verdict on the last claim is still out, Apple handily silenced the nay sayers by reporting earnings that crushed expectations. Earnings per share were US$12.30 when analysts were looking for US$10.02, and revenues were US$39.1 billion when Consensus was calling for US$36.8 billion. iPhones, iPads and even Macs saw sales growth year over year as the market continues to buy up the iPhone 4S and the “new” iPad. Apple is already working on an iPhone 5 which analysts estimate could be launched in the fall. Apple investors certainly aren’t arguing as the stock price has seen tremendous performance since the beginning of the year, up about 50% year-to-date and about 310% since the beginning of the decade.


We haven’t hit the beginning of May yet and already over two-thirds of the Dow Industrial 30 companies have reported their quarterly earnings. It’s been very busy south of the border as most large cap names have released their results, but a few still remain, and we’ll see some of them next week like Pfizer and Kraft Foods. In addition, financial heavyweights Allstate, Visa, and Mastercard are all expected to announce results. As we are much further into U.S. reporting season, it’s now time to focus on Canadian companies as many larger cap names will be on deck next week including energy giants Suncor, Talisman, and Canadian Natural Resources; mining heavyweights Barrick Gold and Cameco; financials such as Great-West Lifeco and Manulife; along with defensives like Loblaws, Fortis Inc, and BCE.

Without a doubt the main event for monetary policy makers next week will be the U.S. employment report which will be due out on Friday. Economists are looking for the creation of 165,000 jobs in March which is higher than February’s 120,00 but still lower than the 200,000+ levels we saw a few months ago. Unfortunately, expectations indicate that the rate of job creation is slowing in the U.S. and while the actual creation of jobs is a positive, many Americans remain unemployed since the recession. In fact, close to six million American jobs lost during the downturn have not returned. It’s no wonder the economy and jobs will be a significant issue when the Presidential election campaign moves into high gear in the fall. In addition to employment, we will also see the ISM Manufacturing and Non-Manufacturing indices which are usually a good barometer for U.S. economic activity. Both are expected to be a little lower than last month, will follows the trend of other recent indicators that have lost momentum from the first quarter of the year.

Since a great deal of focus was placed on monetary policy this week and therefore the U.S. dollar, you may not see as much activity in currency markets until the unemployment report later in the week. As such, the U.S. dollar, the Euro and the Canadian dollar could have a quiet start on Monday, which could result in very little movement for commodity markets as well.


The market was expecting the Federal Reserve’s FOMC meeting to be the most influential event of the week, but did we actually learn anything new from Ben Bernanke and his counterparts?

A good question and the short answer is “not really”. While economists and strategists like to analyze Fed statements and speeches with a magnifying glass trying to interpret word and punctuation changes, the tone of the Federal Reserve hasn’t changed to a large degree. If there was one highlight of Mr. Bernanke’s press conference on Wednesday, it would be when he verbally stated that the Federal Reserve would step in with more Quantitative Easing (QE) if economic conditions worsened. While he did not say that any type of quantitative easing was imminent, the market clearly understands that consideration of more QE is certainly on the table. We still believe that a “QE3” is coming this year and could show up after “Operation Twist” is done, but not too far into the year that it gets too close to the U.S. election. With European GDP numbers continuing to struggle and a recent slowdown in Chinese GDP, the Federal Reserve is not only focused on what’s happening in the United States, it’s also very concerned about the global growth outlook and the stability of the European financial system. While most economists would agree that the U.S. is not headed for a double dip recession, there is far less agreement that the worst for Europe has come and gone. So, U.S. interest rates did not change, the Fed’s expectation of late 2014 for future rate increases did not change, and the Fed’s cautious tone did not change. Now, focus turns to the next Federal Reserve FOMC meeting on June 20 when investors will certainly be looking for hints, or lack thereof, that QE3 is on its way.

Gareth Watson is the Vice President, Investment Management & Research at Richardson GMP in Toronto. This team of research experts is responsible for monitoring and interpreting economic, geo-political situations, current market environments and trends. @Gareth_RGMP

Gareth Watson