Wednesday, April 23, 2014
Stocks have been making strong gains in recent days despite the weak Q1 earnings season, with the broad indexes on the cusp of new record levels. Pre-open sentiment is for a flat open, with a flood of mostly mediocre Q1 earnings reports and favorable-looking economic data out of Europe and China providing the backdrop for today’s trading action.
The Markit’s composite flash PMI for the Euro-zone came in better than expected for April, indicating that economic momentum in the currency block is steadily improving. Today’s survey which tracks both the manufacturing and service sectors of the region’s economy follows positive consumer confidence numbers. On the flip side, an improving economic outlook for the region would imply less of a deflation threat and diminished need for the European Central Bank to be aggressive in fighting it.
China’s April PMI also improved from the prior month’s level, but still remained below the 50 mark. Worryingly, the export and employment components of China’s PMI are moving in the wrong direction. A number of recent Q1 earnings releases - Dow Chemicals (DOW) this morning and Yum Brands (YUM) last evening - show strong gains in China for those companies, but questions about the country’s growth outlook still remain.
On the earnings front, the focus today is on Apple (AAPL) and Facebook (FB) which report after the close. But we have a super earnings calendar today, with more than 150 companies reporting Q1 results, including 38 S&P 500 members. Including this morning’s announcements, we now have Q1 results from 132 S&P 500 members that combined account for 38.8% of the index’s total market capitalization.
Total earnings for these 132 companies are down +0.9% from the same period last year, with 65.4% of the companies beating EPS estimates. Total revenues are up +2.3%, with a revenue ‘beat ratio’ of 43.6% and the median company is missing top-line expectations by -0.1%. Excluding the drag from the Finance sector’s -8.9% earnings decline, total earnings for the rest of the S&P 500 companies that have reported would be up +5.9% on +3.7% higher revenues.
This is weak performance relative to other recent quarters, whether we look at the results with or without the Finance sector. There is not much in earnings growth, most companies are missing revenue estimates and we are not seeing any improvement on the guidance front. What all this means is that the negative revisions trend that has been in place for almost two years will not change. We are seeing that already, with estimates for Q2 (currently expected to be up +4.4%) starting to come down.
This doesn’t seem like the backdrop for stocks to be moving towards record fresh territory, but that’s exactly where we find ourselves. Unless earnings fundamentals have stopped meaning anything in this ‘new normal’, the market’s gains appear to be on shaky ground.
Director of Research
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