Wednesday, June 11, 2014
The positive mortgage applications data notwithstanding, stocks today will likely reflect the weak global growth backdrop emerging from the World Bank report.
Mortgage applications data appears to have finally turned in the desired direction, with gains on both the refinancing as well as purchase sides. This could be indicative that the sharp drop in rates this year has started showing up in lending activities. The +9.3% jump in the purchase index in the latest weekly survey is particularly notable as it has a direct bearing on job creation and economic growth which appeared to have lost momentum in the last two quarters. The gains this week can be called a payback for the earlier weak showing, with the stronger-looking numbers largely a function of comparison to a low base. Sustainability will be the key element going forward, as we need home lending to start playing its due role in the recovery.
U.S. economic data lately has been broadly been positive, confirming hopes of a strong rebound in the second quarter. But the growth picture beyond the U.S. isn’t as reassuring, with Europe struggling with forces of disinflation and the emerging world losing momentum. This underwhelming growth outlook shows up in the latest World Bank growth projections for the global economy, with the institution trimming its estimate for global GDP growth from +3.2% to +2.8%. The World Bank report cites growth challenges in the emerging world, with the outlook for China particularly uncertain.
This uncertain global growth backdrop is at the root of questions about corporate earnings as well. We didn’t see much growth in the Q1 earnings season, with continued weak guidance causing estimates for the current period to come down. Total earnings for the S&P 500 are expected to be up +3.2% in Q2, which is down from the +5.5% growth rate that was expected at the start of the quarter.
But the growth pace is expected to ramp up in the second half of the year and continue into 2015. For that favorable outlook to hold up, we will need to see some change on the guidance front in this coming earnings season. A weak global growth backdrop along the lines indicated in the latest World Bank projections makes it unlikely that we will see the desired change in corporate guidance.
The market has shown admirable patience thus far, delaying the starting point of earnings growth resumption by 3 to 6 months each quarter. Will investors finally run out of patience this time around or cut fundamentals some more slack to catch up with the market? We will find out as the Q2 earnings season gets underway in a few weeks.
Director of Research