Tuesday, May 7, 2013
How do you interpret news stories that cite interest rate cut by Australia’s central bank as the reason for stocks to open higher today? It tells you that there is no real news, forcing media people to come up with something that makes some sense. And rate cut announcements, even by far-off countries that have little relevance to dynamics in the U.S. economy, make for a plausible enough explanation for positive start for U.S. stocks.
The reality is that we are passing through a relatively quiet news period this week. There is still some activity on the earnings front as this week is effectively the last major reporting week of the Q1 earnings season. But not much will happen on the economic calendar till the following week when the April Retail Sales numbers come out May 13th. We will also get Industrial Production, housing, and inflation data next week.
Last Friday’s non-farm payroll report has raised hopes that fears of a Spring Swoon may have been premature. We have to keep in mind though that the jobs data runs counter to what we have been seeing lately from all other economic indicators. Next week’s Retail Sales numbers will give us a better idea of whether the tax hikes and spending cuts are having any bearing on consumption trends. But as far as the stock market is concerned, all it cares about is the Fed. As long as the Fed remains on its easy-money track, investors will be more than willing to stomach soft economic reports. We saw this play out multiple times in recent weeks when stocks sustained their uptrend even in the face of weak economic data.
The Q1 earnings season is winding down. Including this morning’s reports from EOG Resources (EOG), Fossil (FOSL) and others, we now have Q1 earnings reports from 423 S&P 500 companies that combined account for 87.9% of the index’s total market capitalization. Disney (DIS), Whole Foods (WFM) and Electronic Arts (EA) will report after the close today.
Total earnings for these 423 companies are up +3.7% from the same period last year, with 66.4% beating earnings expectations. Revenues are down -0.8%, with only 41.1% of the companies coming ahead of top-line expectations. The composite growth rate for Q1, where we combine the results of the 423 companies that have reported results with the 77 still to come, is for +2.4% growth in earnings on -0.7% lower revenues. This earnings growth rate compares to the modest decline expected at the start of the reporting season.
Consensus expectations for the coming quarters have started coming down, with total earnings in 2013 Q2 now expected to be up +1.6% on -0.5% lower revenues. This is a drop from the +3.9% total earnings growth expected in Q2 on +0.5% higher revenues less than four weeks ago. Expectations for the back half of the year still remain elevated, though they have started coming down modestly. For full-year 2013, total earnings are now expected to be up +6.1%, down from the +6.8% growth pace expected a few weeks back.
Director of Research