In a research note published on September 20, the analyst mentions that the significance of further Fed QE are underestimated by most equity investors and this has been recommended by the strong market rally. Furthermore, although signs of ameliorating worldwide growth would have been favored, this aggressive monetary policy is greeted due to the continuing weakness in most important profit indicators, such as manufacturing, industrial production, exports, capital goods orders and economies that are rising most.
In addition to this, the rise in prices of oil and the euro will probably not prevent third quarter from being the first quarter with y/y EPS decline since the recession ended, still they have offset a number of the continuing weaknesses in manufacturing and exports. Being lower approximately 3 percent y/y, third quarter EPS of $24.75 has been estimated. Even though sub-par growth is possible at all sectors and worse at the defensives, yet Energy and Materials will bear the impact of the y/y plunge. Tighter credit spreads might help the PEs at mega banks and moreover this, QE3 should improve capital markets, however may pressure net interest margins at banks.
The headwind of foreign exchange will be ended by a stronger euro to its EPS growth. Also, as compared to global cyclicals, Tech earnings are more stable, even though it is extremely global. A dip can be caused by misses of the widespread, while weak EPS of third quarter seems to be ignored by the investors.
Moreover, y/y EPS growth is expected to begin again in fourth quarter and tactical dip call would possibly be dropped if investors tolerate weak EPS of third quarter. If Republicans take control of the Senate, then 12 month target of 1500 would probably be lifted, however if Democrats maintain control, it would not be slashed, the analyst adds further.
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