(IBM) Housing Gives Market Boost

Concerns about the earnings outlook in the Tech sector following the less-than-positive reports from IBM (IBM) and Intel (INTC) after the close on Tuesday will likely be a dominant theme in the market today. Offsetting the earnings overhang today is the very strong September Housing Starts report, providing another reassuring look at the improving housing scene.

The September Housing Starts data came in better than expected, up 15% to a seasonally adjusted annual rate of 872K. The prior month’s Starts tally was modestly revised up to 758K from 750K. Permits came in better than expected as well, coming in at 894K vs. expectations of 810K.

The September Permits increase is up 45% from the same period last year, the biggest increase since the early 1980’s. The gains were broad-based, with single-family starts up 11% from the previous month and multi-family starts increasing by 25.1%. Three of the four regions showed gains, with the West showing a 20.1% jump and the Northeast declining.

It is perhaps premature to credit the Fed’s QE3 for the jump in starts, but every little policy nudge helps. It is becoming increasingly obvious that the housing sector has turned the corner. In fact, mortgage banking has been one of the bright spots in bank earnings reports lately and the earnings outlook for homebuilders is one of the best in the entire S&P 500. The housing report is no doubt very positive and will likely blunt some of the negativity from Tuesday’s Tech sector earnings reports.

With respect to the current scorecard of the earnings season, we have 68 reports from S&P 500 companies as of this morning, or 13.6% of the index’s total membership. Total earnings for these 68 S&P 500 companies are down 0.5% from the same period last year, with 58.8% of the companies beating expectations with a median surprise of 2.4%. Total revenues for these same companies are up 0.6%, but only 35.7% of the companies have come ahead of revenue expectations.

The early reports are predominantly weighted towards the large banks in the Finance sector, with earnings from the 20.4% of Finance Sector firms up 1.3% from the same period last year. Earnings from the banks that have already reported results, including Bank of America (BAC) this morning, account for 46.2% of all third quarter earnings from the Finance sector. Excluding Finance, total earnings for the companies that have already reported results will be down 1.7% from the same period last year.

Total earnings for the 432 S&P 500 companies still to report results (86.4% of the index’s total membership) are expected to be down 3.2% from the same period last year and down 7.5% when Finance is excluded. As was the case in the previous quarter, revenue gains are hard to come by due to the weak economic backdrop. Currency impacts also appear to be a contributing factor as we have seen thus far with Pepsi (PEP) this morning and Coke (KO) and IBM on Tuesday.

Zacks Investment Research

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