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Ahead of Wall Street

Friday, June 20, 2014

With not much on the economic calendar, stocks today will likely reflect the positive momentum generated by Wednesday’s Fed meeting. Trading volumes today will be reflective of seasonality factors, but expiration of option and futures  contracts (quadruple witching) will give volumes some lift in today’s session.

The Fed’s dovish commitment is a very powerful elixir for this market, trumping any other catalyst on the horizon. And we don’t have much in terms of economic or corporate earnings catalysts over the next couple of weeks anyway. On the economic docket next week are a couple of housing reports and another look at the Q1 GDP read. The GDP report is essentially record keeping at this stage, with the greater negative revision to the Q1 growth pace unlikely to weigh on investors’ outlook for the current and coming quarters. Data for the current quarter has been consistently positive enough that GDP growth estimates remain north of 3%, with some of the more aggressively optimistic estimates above the +4% level.

But irrespective of the pace of growth in Q2, there is not much visibility about the second half of the year and beyond. The question is whether economic growth will ‘graduate’ to an above-trend +3% pace in the second half of the year and gain further momentum next year? Or will it revert back to what Steve Reitmeister likes to call muddle-through-growth of no better than +2%? Something similar is at play on the corporate earnings front as well. Earnings growth is expected to improve in Q2 from the prior period’s tepid pace, but the uncertainty is about the coming periods and not what happened in Q2. Some of the May-quarter reports that we have seen already from the likes of FedEx (FDX - Analyst Report), Oracle (ORCL - Analyst Report) and others offer a mixed picture. Cost controls and share buybacks continue to be the primary driver of EPS growth, with top-line gains remaining elusive. We are still a few weeks away from the full start of the Q2 earnings season. But if these early reports are any guide of what to expect from this coming earnings season, then we may not see the long hoped-for rebound in the earnings growth picture.

The stock market’s record level reflects an ever helpful Fed in a backdrop of steadily improving economic and corporate earnings fundamentals. Market bulls are 100% correct if that is a true reflection of ground realities. I will be more than happy to ditch my lonely bearish stance and join the party, but I find it hard to buy into this optimistic narrative.

Sheraz Mian
Director of Research

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