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Ahead of Wall Street

Monday, May 6, 2013

With the Q1 earnings season now largely behind us and not much on the economic calendar either, stocks may struggle to sustain the momentum from last week in the absence of a catalyst. We should keep in mind however that the market’s push into record territory has not been driven by economic or earnings data.

In fact, one could say with reasonable confidence that stocks reached the current record levels in spite of economic and earnings data and not because of it. It’s the Fed that is the key driver of the outsized market gains. The Fed is not alone; other key central banks like the Bank of Japan and the European Central Bank are equal partners in this global central bank cartel. Investors remain confident that as long as the Fed and other global central banks keep the money spigots open, they don’t need to worry too much about economic and earnings data.

Yes, the April jobs report came in better than expected and added that extra bounce to the market on Friday. But one could reasonable envision the market making gains on Friday even if the jobs report had come otherwise. That’s exactly what the market had been doing for weeks despite sub-par economic and earnings data. The jobs report runs counter to every other piece of economic data in recent weeks.

No reason to doubt the April jobs data as such, but all that the report tells us is that the U.S. economy may have more resilience this year than was the case in the recent past, which should help it withstand the fiscal tightening in relatively better shape. From the market’s perspective, the key take-away from the jobs report is that the growth momentum is fragile enough to keep the Fed on its easy-money-policy course.

On the earnings front, including this morning’s Tyson Foods (
(TSN - Analyst Report)) earnings report, we now have Q1 earnings reports from 407 S&P 500 companies that combined account for 86% of the index’s total market capitalization. Total earnings for these 407 companies are up +3.7% from the same period last year, with 67.3% beating earnings expectations. Revenues are down -1%, with only 42% of the companies coming ahead of top-line expectations. The median surprise is +3.4% on the earnings side and negative -0.4% on the revenue side thus far. The earnings growth rate is better than what this same group of companies achieved in 2012 Q4, but comparable to the 4-quarter average, though the revenue performance is decidedly on the weak side.

The composite growth rate for Q1, where we combine the results of the 407 companies that have reported results with the 93 still to come, is for +2.4% growth in earnings on -0.7% lower revenues. This earnings performance would normally be inconsistent with a stock market in record territory. This is better performance than pre-season expectations, but hardly consistent with a market in record territory.

Sheraz Mian
Director of Research

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