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Ahead of Wall Street

Tuesday, April 29, 2014

Stocks are indicated higher ahead of the open today. But as we have become used to seeing lately, market sentiment can shift intraday without much advanced warning. With the earnings season now past the halfway mark and a seasonally weak period ahead for the market, we should probably brace ourselves for more weakness and volatility in the coming days.   

Q1 earnings results have not been as weak as the extremely low levels to which estimates had fallen ahead of the start of the reporting season seemed to suggest. But this positive-looking development has proven insufficient to give this year’s tentative market a directional thrust. And for good reason. Stocks ran up big last year in anticipation of earnings growth resumption down the road and that hope still remains unrealized.

With respect to the updated Q1 scorecard after this morning’s results from Merck (MRK - Analyst Report), Coach (COH - Analyst Report), Cummins (CMI - Analyst Report) and others, we now have Q1 results from 268 S&P 500 members that combined account for almost 63.9% of the index’s total market capitalization. Total earnings for these 263 companies are up +2.3% from the same period last year on +3.4% higher revenues, with 67.5% beating EPS estimates and 48.1% coming out with positive revenue surprises.

Compared to other recent quarters, the earnings growth performance from these 268 companies is on the weak side (largely due to the Finance sector), revenue growth and earnings beat ratios are along historical levels, while the revenue beat ratios are tracking lower. The growth picture improves a bit once the Finance sector is excluded from the aggregate picture.

The fact that Q1 results have been less weak relative to pre-season expectations tells us little about what to expect about the coming quarters the outlook for which remains cloudy. The persistently weak guidance from management teams is prompting 2014 Q2 estimate to come down and the pace of negative revisions is likely to accelerate in the coming days as we move towards the end of the Q1 earnings season. This is hardly the type of earnings backdrop that will push stocks higher.

Sheraz Mian
Director of Research

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