Thursday, May 9, 2013

Stocks continue to defy gravity and today’s market action will likely be no different despite the frothy-looking inflation data out of China and the soft tone of pre-open sentiment. Offsetting the Chinese inflation numbers are the better than expected weekly Jobless Claims data on the home front, which should help sustain the positive sentiment created by last week’s better than expected April jobs report.

Irrespective of the tone of today’s jobs data from the home front or Chinese inflation news, the stock market seems to know only to move in one direction. That’s not what history tells us, but that’s what we have been seeing lately. The jobs data last week was undoubtedly positive, as are this morning’s initial claims numbers. But stocks had been moving higher even before the jobs numbers in the face of all around underwhelming economic and earnings data. The takeaway from this market behavior is that as long as the Fed remains on its current course, the market will be more than willing to overlook fundamentals.

The Q1 earnings season, now in its final stretch, has mostly been 'average' or 'below average', but you wouldn't see that in the market's response. Including this morning’s reports from Dean Foods ( ( DF - Analyst Report ) ), Apache ( ( APA - Analyst Report ) ), and Dish Network ( ( DISH - Analyst Report ) ), we now have Q1 results from 445 S&P 500 companies. Total earnings for the 445 companies are up +3.6% from the same period last year, with 65.6% beating earnings expectations. Revenues are down -0.9%, with only 41.8% of the companies coming ahead of top-line expectations. The composite growth rate for Q1, where we combine the results of the 445 companies that have reported results with the 55 still to come, is for +2.4% growth in earnings on -0.8% lower revenues.

The Q1 earnings growth rate has turned to be better relative to pre-season expectations, but top-line performance has undoubtedly been on the weak side. Estimates for the coming quarters, particularly Q2, have started coming down giving the overwhelmingly soft tone of company guidance. However, expectations for the back half of the year and next year still reflect a level of growth rebound that is inconsistent with what we have seeen in the last few quarters, including the Q1 earnings season.

Sheraz Mian
Director of Research