Why Earnings Are More Important Than the Fed
Business + Economy

Why Earnings Are More Important Than the Fed

REUTERS/Alex Domanski

The Federal Reserve in the coming week is expected to end its quantitative easing program—the much-anticipated action that's been at the very heart of the market's fears.

After a two-day meeting, the Fed Wednesday is expected to announce the completion of its bond purchases, based on improvements in the economy. Markets will now look forward to the time—expected at some point next year—when the Fed believes the economy is strong enough for it to raise short-term interest rates from zero.

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The economic calendar also heats up in the week ahead, with durable goods Tuesday; third-quarter GDP Thursday, and income and spending and employment costs data Friday. All of the data becomes even more important as the markets attempt to interpret the Fed's process of normalizing rates.

The Fed "tries to reinvigorate corporate risk taking, and finally we get to the point where corporate risk taking picks up again, and they're supposed to remove the accommodation. That was just a bridge," said Tobias Levkovich, chief equity strategist at Citigroup.

While recent market volatility has been blamed on everything from Ebola to a global growth scare, one common thread going through all markets is the underlying concern that the Fed's removal of its easing program will be the financial equivalent of taking off the training wheels. Markets already have stumbled, and analysts expect more volatility ahead as they continue to move closer to a world with more normal interest rate levels.

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Stocks have begun to stabilize, recovering from the bottom hit Oct. 15, with the best weekly performance for the S&P 500 since January 2013. "Earnings are much more important than the Fed. We've had markets go up when the Fed was raising rates," Levkovich said. The S&P 500 was up 4.1 percent in the past week, reaching 1,964, just 45 points from its all-time high after a 9.8 percent decline from the September peak.

Traders have long looked at the Fed asset purchases as a needed fix for markets, to juice risk assets and bring in liquidity, but some were becoming concerned the program was been in place for too long and was creating potential market bubbles. The end of the QE program has sent ripples through markets, as the dollar rose, stocks moved dramatically, and even the more staid bond market saw unusually sharp moves.

"Unless you have some serious problems internationally, then we should get the earnings growth and that should support the market," Levkovich said.

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Dozens of companies report in the week ahead, with big oil names like BP and Exxon Mobil, social media companies like Facebook and Twitter, and pharmaceuticals including Merck and Pfizer. So far earnings have been a positive for stocks, particularly industrial names.

According to Thomson Reuters, 70 percent of the S&P 500 companies reporting so far have beaten earnings estimates, while 59 percent have beaten on revenues. The materials, financials, health care, and industrial sectors have had the most beats on a percentage basis, while consumer discretionary and utilities had more misses so far.

Pimco portfolio manager Tony Crescenzi said the Fed will seek to make few waves this week when it ends the QE program. Language on keeping rates low for a "considerable time" will probably be left in its statement or replaced with something very similar. St. Louis Fed President James Bullard suggested market volatility could delay the Fed's plan to end QE, but most Fed watchers expect it to finish the program.

"Given the volatility in markets recently, and the decline in inflation expectations, this will be a time to aim to do no harm, and that is the likely tone of the statement," Crescenzi said. Even with the end of QE bond purchases, the Fed continues to replace securities on its balance sheet as they mature, and it holds about $4.4 trillion in assets.

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"The committee's sizeable holdings should maintain downward pressure on rates," Crescenzi said, adding some Fed officials believe the large balance sheet is a more powerful tool than the actual bond purchases.

Ward McCarthy, chief financial economist at Jefferies, said the Fed will slowly move away from its easing programs, since it has to manage both the balance sheet and the move back to higher interest rates. "I think the Fed wants to stay under the radar right now, and work out a number of issues between now and the December meeting, when they'll probably make some changes and try to improve on their communication," he said.

As for the economy, this week the first look at third-quarter GDP is of big interest. As Crescenzi notes, it would be the fourth of five reports to show 3 percent plus growth if it comes in at 3 percent as expected. "Given all the anxiety about global growth, the U.S. is the shining star in the global growth constellation so that will be an important number from a psychological standpoint," McCarthy said. "I think it should be pretty good at 3.2 percent. The first estimate is always a bit of a wild card."

Around the World
Traders will be watching Europe over the weekend, where the results of bank stress tests are expected to be announced Sunday morning. The euro was stronger Friday, as traders expected the stress tests would not reveal too many major problems. Reuters reported 25 banks failed the tests, and they either have or will have to shore up capital.

The Brazilian presidential election will be decided in a runoff vote Sunday, between President Dilma Rousseff and pro-business candidate Aecio Neves. Crescenzi said Brazilian yields have been rising, reflecting a probable Rousseff victory. Markets could be very volatile if she does not win, he said.

What to Watch:

Earnings: Merck, Amgen, Seagate Technology, Twitter, United Health Services, Buffalo Wild Wings, Healthsouth, Tenneco, Hartford Financial, T-Mobile US, XL Group, Cliffs Natural Resources, AvalonBay, PMC-Sierra

FOMC meeting starts 

Earnings: BP, Facebook, Pfizer, Gilead Sciences, Dupont, Anandarko, Electronic Arts, UBS, Novartis, Sanofi, Honda, Sirius XM Radio, Coach, AutoNation, Cummins, CIT, Corning, Consol Energy, Newfield Exploration, Noble Energy, TD Ameritrade, Starwood, Express Scripts, Panera Bread, Western Digital, Marriott, Vertex Pharma, US Steel, Luxottica, Owens-Illinois, Whirlpool

8:30 a.m.: Durable goods

9:00 a.m.: S&P/Case-Shiller home prices

10:00 a.m.: Consumer confidence

10:00 a.m.: Housing vacancies

1:00 p.m.: $29 billion 2-year note auction

Earnings: Deutsche Bank, Visa, Kraft Foods, Fiat Chrysler, Allstate, Statoil, Total, Range Resources, Murphy Oil, Suncor, Ralph Lauren, Nintendo, Phillips 66, Questar, Akamai, Hyatt, McGraw-Hill Financial, Wellpoint Health, Hershey, Hess, Praxair, Agnico Eagle Mines, RF Micro,Dreamworks Animation, F5 Networks, MetLife, Baidu, Flextronics, Williams Cos, Shutterfly, Southern Co, Automatic Data, Carlyle Group, Boaz Allen

7:00 a.m.: Mortgage applications

10:30 a.m.: EIA oil inventories

1:00 p.m.: $35 billion 5-year auction

2:00 p.m.: FOMC statement

Earnings: Royal Dutch Shell, Samsung Electronics, ConocoPhillips,Kellogg, Mosaic, Microchip Tech, Expedia, Crown Castle, Eastman Chemical, Boston Beer, Newmont Mining, Mohawk, Tesoro, Groupon,LinkedIn, Teva, Altria, Starbucks, Johnson Controls, New York Times, Eni, Fortress Investments, Starz, GNC Holdings, LPL Financial, Old Dominion Freight Line, CME Group, Public Storage, Time Warner Cable

8:30 a.m.: Weekly jobless claims

830 a.m.: Q3 real GDP

9:00 a.m.: Fed Chair Janet Yellen makes welcoming remarkets at Fed conference in Washington, No Q&A

1:00 p.m.: $29 billion 7-year note auction


Earnings: Exxon Mobil, Chevron, Sony, A-B InBev, AbbVie, Clorox, BNP Paribas, Madison Square Garden, Pinnacle West, Newell Rubbermaid, Rockwell Collins, NextEra Energy, Charter Communications, Legg Mason, CBOE Holdings, Weyerhaeuser, Teco Energy, Dominion

8:30 a.m.: Personal income and spending

8:30 a.m.: Employment cost index

9:45 a.m.: Chicago PMI

9:55 a.m.: Consumer sentiment

This article originally appeared in CNBC.

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