John Manley

Fourth-quarter earnings: Good, but room for improvement

AdvantageVoice® Blog—2-24-14
John Manley, CFA, Chief Equity Strategist

I think it is fair to say that, so far this year, the headlines in the financial press have focused largely on the increased volatility of the equity market. Following a great, though still volatile, year for stocks, January brought us a sharp and nasty drop in stock prices. It seemed to be a classic bull market correction: coming from nowhere, preceded only by a short period of complacency, and marked by a few bad days for investors.

There was a lot to talk about with emerging markets economies, and currencies came under pressure as the U.S. Federal Reserve continued to taper at a steady pace. Around the world, manufacturing activity staggered slightly, either due to a slight inventory build in the prior quarter, bad weather in the current quarter, or some unexpected slackening in final demand. Undoubtedly, it was news.

Concerns about acute and chronic problems in the world moderated in the last two months of 2013. For a while, it seemed as if the only thing to worry about was how difficult it was to find something to worry about. Well, that didn't last long. By late January, the bullish/bearish sentiment indicators from the American Association of Individual Investors were clearly showing the effects of a perceived global slowdown. The percent of respondents who were bullish dipped below 28%, while bearish respondents rose to well over 35%. These numbers showed less optimism and more concern than the polls taken at the same time in 2013. It would seem that the wall of worry had yet again re-emerged on the scene.

I think that is a good thing for the equity market, but I am not sure if it takes into account other less sensational news that has occurred since the beginning of the new year. In the past six weeks, a good number of companies have reported fourth-quarter sales and earnings results. I think that these results were reasonably good and quite promising. Almost two out of three companies beat sales estimates for the first time in nearly two years. The beats were not large, but they were beats. A slightly higher percentage of companies beat expectations at the bottom line, and it now appears that the year-over-year growth of earnings will come in at 8.3%, a better number than predicted even a month ago.

The message is that earnings can still improve from here. I know that current profitability metrics are quite high by historical standards, but, unlike the past, there has been little help from a vibrant worldwide economy. I think that vibrancy is yet to come. The fourth quarter of 2013 results may offer a peek into the future. If I am right, better top-line growth from a slightly stronger world economy can still produce positive surprises at the bottom line. I think that will help the market throughout 2014.

The views expressed are as of 2-24-14 and are those of Chief Equity Strategist John Manley, CFA, and Wells Fargo Funds Management, LLC. The information and statistics in this report have been obtained from sources we believe to be reliable but are not guaranteed by us to be accurate or complete. Any and all earnings, projections, and estimates assume certain conditions and industry developments, which are subject to change. The opinions stated are those of the author and are not intended to be used as investment advice. The views and any forward-looking statements are subject to change at any time in response to changing circumstances in the market and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally, or any mutual fund. Wells Fargo Funds Management, LLC, disclaims any obligation to publicly update or revise any views expressed or forward-looking statements.


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