Even though third quarter earnings were revised lower, companies are beating and investors like it.
Case in point: Caterpillar (NYSE:CAT) was expected to earn $1.54 a share after it warned that the quarter would be weaker back in August. But this morning, Caterpillar posted $1.71 a share and raised its guidance for the rest of the year.
We can assume that the weaker earnings, along with weaker growth was priced in when earnings season kicked off.
In fact, the rally started before earnings season kicked off with Alcoa (NYSE:AA) on October 11. The bottom hit on October 3, and the S&P pushed up to resistance at 1,200 on October 10. Friday, the S&P 500 took out the 1,225 resistance level.
The 1,250 area poses more significant resistance, and it won’t be a surprise if there is a pullback in the coming week. But still, stocks are acting like they want to break higher.
It’s worth asking what could push prices higher, and conversely, what the threats are. For more upside, I’d say we just have to keep bad news at bay. China needs to hold steady, as does U.S. economic data.
Economists are already suggesting that 3Q GDP growth was better than expected, perhaps as strong as 2.5%. Again, Caterpillar and others are giving anecdotal evidence that growth has improved. And recent economic data is putting a number behind it, like last week’s Philadelphia manufacturing survey, which came in much better than expected.
Now, 2.5% is not exactly strong growth, but it sure beats the 0.9% we got for the first half.
Also, as much as I hate to say it, there’s Europe. The EU finished up a summit this weekend, and starts another in just a few days.
At this point, one could argue that the market likes the indecision of the EU regarding Greece and its banks. After all, so long as Euro-banks don’t have to take the Greek debt write-down, we don’t have to deal the fallout. Of course, it’s inevitable that default must happen.
Over the weekend, France insisted its banks would be fine with a 50% write-down, which amounts to around 100 million euro. The banks are reportedly asking for 40% default. And discussions still called for new bank capitalization of 100 billion euro ($134 billion). (I doubt those numbers are a coincidence.)
Of course, like a discussed Friday, Europe would be making a big mistake if it simply did only what corporations thought it needed to. It’s been said repeatedly, but Europe needs to do more — much more — than is necessary. It needs to leave no question that its banks can weather the storm.
The situation is still a bit confused. Perhaps that’s why the euro is off against the U.S. dollar this morning. In any event, we will have more clarity on the Euro situation by Wednesday.