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What's Driving the Sentiment Shift?

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Friday, February 14, 2014

Stocks have been up this week were up in five of the last six sessions and remain on track to close the week on a positive note, with favorable data out of Europe adding to an overall air of calm about the global economic backdrop. Sentiment shifted materially this week, particularly following Janet Yellen’s Tuesday testimony, helping erase most of the year-to-date losses. Investors seem to have decided that the recent run of soft economic data is nothing more than a weather-induced speed bump and will disappear as the skies clear.

Europe’s economy expanded at a modestly better than expected pace, driven by German which accounts for about a third of the region’s economic output. Growth did expand to formerly weaker economies, with France, Italy, and Spain, with even Greece contracting less than expected. The Euro-zone economy came out of recession in the second quarter of 2013 and has been stay in the positive column for three quarters in a row, but still remains below the pre-2008 peak level. That said, this is good news for the European Central Bank which has lately been under pressure to cut interest rates to fight dis-inflation and low growth.

On the earnings front, including this morning’s reports from J.M. Smucker (SJM - Free Report) and Campbell Soup (CPB - Free Report) , we now have Q4 results from 401 S&P 500 members that combined account for 86.2% of the index’s total market capitalization. Total earnings for these companies are up +11.1% from the same period last year, with 68.6% coming ahead of consensus EPS estimates. Total revenues are up only +0.8% and 61.1% have beat revenue expectations. Revenue weakness has been a recurring theme in recent quarters and Q4 is no different, though the unusually low growth pace thus far is mostly due to the Finance and Energy sectors, particularly one-off tough comps for Prudential Financial (PRU - Free Report) .

The Q4 earnings season has overall been not that bad, with the earnings growth rate the highest of 2013 and total earnings on track to reach a new all-time quarterly record. Companies have beat estimates, both EPS and revenue, at an above-average rate. But they continue to guide lower, prompting estimates for the current quarter to come down. Total earnings for 2014 Q1 are now expected to decline by -2.3%, down from estimates of +2.1% at the start of the Q4 reporting season. With weather an even bigger factor for companies in the retail sector that will be coming out with results in the coming days, we will likely see even more downside pressure on Q1 estimates.  

Sheraz Mian
Director of Research

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