October 25, 2016

Stocks fell at the open this morning (Dow -57 pts; SPX -.37%). Nearly all major market sectors are lower, save utilities and consumer staples. But most of the movement today is in individual stocks following earnings announcements. WTI crude is down slightly to $50/barrel. Baker Hughes says US land-based drilling activity is increasing. The dollar is flat and other commodities are mixed. Copper is up over 2% as China’s stock market hit a 9-month high. China GDP is up 6.7% for three straight quarter encouraging investors to believe China has stabilized. Bonds are mostly unchanged on the day. 

Goldman Sachs says the economy and market will remain in slow-growth mode. “The US economy will remain stuck in a slow secular growth regime,” according to Chief US Equity Strategist David Kostin. He believes S&P 500 earnings growth will be about 5% this year, 10% next year, and then 5% again in 2018. So his price target for the S&P is 2,300 for year-end 2018 and that implies a 7% cumulative return for stocks over the next two years.  

Merck (MRK) reported third quarter revenue and earnings growth of 5% and 11%, respectively. Both metrics beat expectations. But the reason the stock is up 1.2% this morning (on top of the 15% YTD gain) is the fact that management raised earnings guidance for the fourth quarter. It looks like the company’s Keytruda drug will be granted first-line status for treating lung cancer. 

Lockheed Martin (LMT) reported impressive third quarter results, with 30% earnings growth. In addition, management raised 2017 sales growth guidance to 7%. I think part of reason earnings beat estimates by such a wide margin is that analysts are having a hard time forecasting due to the complexity of defense project accounting, a lack of clarity with government orders to buy F-35 fighter jets, ongoing share buy-backs and the recent spinoff of the company’s IT services business. The stock is up 6% today.

Procter & Gamble (PG) reported a stellar quarter with organic sales growth of 3%. All of the company’s five business segments showed accelerating organic sales growth. The stock is up 4.5% this morning.  

Sherwin Williams (SHW) disappointed investors with its third quarter results. Revenue rose 4%, matching expectations. But earnings growth of 7% y/y was a bit light. The paint stores division was OK, posting 6.7% total sales growth and 2.1% same-store-sales growth. The demand overseas was weak, however, and there was some weakness in US retail. The real issue, however, is that management reduced its current quarter earnings guidance by 10%. The stock is down 8.5% at the moment. We’ve seen some weakness in third-quarter reports for other home improvement/building materials stocks like Masco (MAS), Whirlpool (WHR), Home Depot (HD) and USG Corp. (USG) though it seems like Wall Street feels this is temporary. 

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