Ceasefire in the Ukraine, Retailers Beat - Ahead of Wall Street
Thursday, February 12, 2015
The Ukraine ceasefire news and lack of a Greece deal provide a mixed backdrop for stocks. But the seemingly obvious implication of any of these developments may not be the right way to look at either of them. On the data front, we got another weak monthly Retail Sales report this morning just as the Q4 earnings season is moving into the retail sector’s reporting cycle.
The Ukraine ceasefire no doubt produces a near-term respite in the conflict, but it is naïve to think that Russia will back any final solution that stops short of giving them a firm foothold in Ukraine and a secure land route to its newly acquired Crimean territory. What this means is that while we should applaud today’s announcement about the silence of the big guns on both sides, we shouldn’t lose sight of the big forces driving the conflict in the first place.
The lack of any agreement in Wednesday’s EU meeting about Greece came as a disappointment. But they are scheduled to meet again on Monday and Greece’s existing credit facility runs through the end of the month, so one can reasonably expect them drag this thing right to the end. That said, everybody understands that Greece’s negotiating leverage is no longer as good as it was a couple of years back; they will be committing a huge mistake by overplaying their hand in the current environment.
What this means is that a deal will most likely be reached, though it may not come for another couple of weeks. The resulting uncertainty will be the issue that markets will have to get used to deal with.
Beyond Greece and Ukraine, we are entering the stage in the earnings season when Retail Sector companies start dominating the reporting cycle. Retail is the only sector where more than half of its total Q4 reports are still awaited; we are quite further along in the reporting cycle for all the other sectors. Including this morning’s reports from Kellogg (K), Avon (AVP) and others, we now have Q4 results from 376 S&P 500 members or 74.9% of the index’s total membership.
For the Retail sector, we have Q4 results from 47.6% of the sector companies in the S&P 500 index as of this stage, with total earnings for these retailers up +1.9% on +9.1% higher revenues, with 70% beating EPS estimates and 55% beating top-line estimates. Unlike the monthly Retail Sales numbers from the Commerce Department, which came in weaker than expected this morning for the second month running, the sector’s results thus far have largely been encouraging.
Market participants have been happy with the sector’s results thus far, with retail stocks moving favorably — the most of any other sector — in response to earnings announcements. Maybe it’s a case of results coming ahead of very low expectations or investors looking for the impact of lower gasoline prices.
But Retail sector stocks have done better than any other sector in response to the Q4 earnings announcement. We will see if this trend will remain in place through the rest of this earnings season, but investors seem to be liking what they are hearing from retailers at this stage.
Sheraz Mian
Director of Research
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