Back to top

Ahead of Wall Street

Friday, March 22, 2013

The moral of the Cyprus story is that it pays to be ‘too-big-to-fail’; the Europeans are essentially telling the Cypriots that they don’t mind letting their banking system go under. It’s up to Cyprus now. If they can raise the money, they will get bailed out, otherwise not. As far as financial markets are concerned, the Cyprus story is nothing more than background noise – they are ‘too-small-to-matter’.

Far more important to the market than Cyprus is to figure out what the weak results from the likes of Oracle (
(ORCL - Analyst Report)) and FedEx ((FDX - Analyst Report)) tell us about global capital spending and economic growth. FedEx has been struggling for a while now, so their negative surprise may not be so ‘surprising’ even though it was. But is the Oracle ‘miss’ a sign of things to come in the all-important Tech space? Expectations for first quarter earnings from the Tech sector are already quite low, but should we brace ourselves for even more weakness? The sector wasn't exactl in prime health in the fourth quarter either.

Total Tech sector earnings are expected to drop -5.1% in the first quarter after the +1.6% gain in the fourth quarter. The weakness is broad based and not just because of tough comparisons for Apple (
(AAPL - Analyst Report)), whose earnings are expected to be down almost -15% this quarter. Other major sector players like Intel ((INTC - Analyst Report)) and Seagate Technology ((STX - Analyst Report)) also have tough comparisons. But the sector’s earnings would be down from the same period last year even if we exclude these companies.

Tech side, the overall growth numbers for the first quarter as whole look very underwhelming. Total earnings for companies in the S&P 500 are expected to drop -2.8% from the same period last year, which reflects -1% decline in total revenues and a modest contraction in margins. This compares to +2% growth in the preceding quarter. A combination of weak company guidance and tough comparisons account for the weak growth expectations - the first quarter of 2012 still remains the high point in quarterly earnings totals since the start of the current earnings cycle in 2009.

Investors don’t seem to be overly concerned about lack of earnings growth in the first quarter. The reason for that is that they are banking on strong  growth in the following quarters. The consensus view is that earnings growth in the first half of 2013 will be roughly equivalent to the growth pace in the second half of 2012 – of about +1%. But they are looking for double-digit earnings growth in the back half of 2013 and full-year 2014. And as long as that outlook remains intact, they will learn to live with a weak growth pace in the first quarter.

But it will likely get harder to stick to that outlook if companies can’t provide reassuring guidance for the rest of this year. And it is in this context that results from the likes of Oracle and FedEx matter.

Hard to tell which way the Cyprus story will unfold in the coming days, but it may not matter in the end any way.

Sheraz Mian
Director of Research

Please login to Zacks.com or register to post a comment.

New to Zacks?

Start Here

Zacks Investment Research

Close

Are you a new Zacks Member or a visitor to Zacks.com?

Top Zacks Features

My Portfolio Tracker

Is it Time to Sell?

One of the most important steps you can take today is to set up your portfolio tracker on Zacks.com. Once you do, you'll be notified of major events affecting your stocks and/or funds with daily email alerts.

More Zacks Resources

Zacks Rank Home - Evaluate your stocks and use the Zacks Rank to eliminate the losers and keep the winners.

Mutual Fund Rank Home - Evaluate your funds with the Mutual Fund Rank for both your personal and retirement funds.

Stock/Mutual Fund Screening - Find better stocks and mutual funds. The ones most likely to beat the market and provide a positive return.

My Portfolio - Track your Portfolio and find out where your stocks/mutual funds stack up with the Zacks Rank.

Zacks #1 Rank Top Movers for Zacks #1 Rank Top Movers

Company Symbol Price %Chg
CENTURY ALU… CENX 22.53 +4.50%
ERBA DIAGNO… ERB 2.91 +4.30%
PLANAR SYST… PLNR 4.31 +3.86%
MALLINCKROD… MNK 72.17 +3.83%
GTT COMMUNI… GTT 12.06 +3.52%