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Growth and Earnings Shift to the Slow Lane

October 15, 2012

According to FactSet, the estimated third-quarter earnings growth rate for the S&P 500 is now -2.6 percent versus last year (this estimate had been as high as 1.9 percent as of June 30). If this estimate holds, it will represent the end of 11 consecutive quarters of earnings growth for the index.
-John Bonnell, assistant vice president of fixed income investments, USAA

Stocks struggled this week as investors digested a new report by the International Monetary Fund and prepared for the flood of third-quarter corporate earnings reports that will be forthcoming over the next few weeks.

The IMF released the October edition of its World Economic Outlook this week, cutting its forecast of global growth to 3.3 percent and 3.6 percent for 2012 and 2013, respectively. The IMF noted that developed country growth is now "too low to make a substantial dent in unemployment." This is a point that we have made for some time. The report states that contributors to sluggish growth include fiscal consolidation (i.e., "austerity") and a still-weak financial system. The IMF also pointed to weakening growth in emerging markets. The reluctance of governments to pursue meaningful pro-growth economic policies will likely ensure muted growth for the foreseeable future.

According to FactSet, the estimated third-quarter earnings growth rate for the S&P 500 is now -2.6 percent versus last year (this estimate had been as high as 1.9 percent as of June 30). If this estimate holds, it will represent the end of 11 consecutive quarters of earnings growth for the index.

Investors will eagerly look to management comments during earnings season for clues to the state of the global economy and perhaps some insight into what 2013 might hold in store for their businesses. Reports are expected next week from a wide variety of prominent companies including IBM, Johnson & Johnson, McDonald's, Bank of America, Google, Microsoft and Verizon Communications.

The most significant U.S. economic report released this week was the update on prices at the wholesale level, which indicated inflationary pressures remain muted, at least according to the methodology used by the U.S. Department of Labor. For September, the producer price index was higher than expected, but 1.1 percent is still considered low by Street standards.

For the week, the S&P 500 index fell 2.19 percent to 1,429. The price of the 10-year U.S. Treasury note moved higher, with the yield falling 0.08 percentage points to end the week at 1.66 percent. The price of gold fell from its recent high, slipping 1.47 percent to $1,754 per ounce.

Next Week's Key Economic Releases

  • Retail sales
  • Consumer price index
  • Industrial production
  • Housing starts
  • Existing home sales