Tuesday, April 2, 2013
Today’s market action will likely see a reversal of Monday’s modest pullback that had some people start thinking of the long-awaited ‘correction’. Monday’s action was likely nothing more than the market’s typical tentativeness ahead of key economic data – with Friday’s March jobs report being the key data point this week.
The market’s impressive run from the November lows has remained in place despite doubts from many, myself included. And this will likely continue till uncertainty increases on two related fronts – the economy and earnings.
Monday’s underwhelming manufacturing ISM report notwithstanding, recent economic data has been positive for the most part. The sum total of these reassuring economic readings has helped raise expectations for the current and coming quarters.
As a result, GDP growth expectations for the first quarter are almost double what they were at the start of the period. This growth momentum is expected to accelerate further in the second half and carry into 2014. But our history of the last three years shows a pronounced seasonal tendency for the economy to lose steam in the Spring/Summer months. There is no evidence of such a Spring Swoon at this stage, but there is no shortage of potential catalysts that could trigger such weakness.
Related to the economic question is the outlook for corporate earnings. We haven't had much earnings growth lately. In fact, earnings have been essentially flat in the second half of 2012. This flat (or non-existent) earnings growth trend is expected to persist through the first half of 2013 and then shift gears in the back half to a double-digit growth pace. The acceleration carries into 2014, giving us another double-digit growth rate that year. We will test these expectations as the first quarter earnings season gets going from next week onwards. The initial reports from companies like FedEx (FDX) and Oracle (ORCL) have been less than inspiring. But we will have to wait and see if current expectations for the coming quarters, particularly the second half of the year, will hold up.
Many factors could come in the way of this market rally – from changing expectations about the Fed’s QE program to other ‘known unknowns’. But it’s hard to envision the prevailing optimism remaining in place in the absence of current economic and earnings outlook.
Director of Research
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
More From Zacks.com
- Investment & Company Information