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Ahead of Wall Street - August 8, 2012

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Wednesday, August 8, 2012

It will be reasonable to expect the market to take a breather today after three days of gains that has pushed it to within striking distance of the year’s high reached in the Spring. The gains are hard to justify given the absence of any accompanying corporate or economic news, though we did see some sign of life in the labor market last Friday after months of disappointments. This morning’s favorable productivity and unit labor cost data for the second quarter also appears to confirm some positive movement on that front.
But the market seems to be betting that the Fed will come through with its magic wand despite these signs of life in the labor market. Nobody is ready to be on the wrong side of the hoped-for Fed action. We may see some early indications of the Fed’s thinking from the central bank’s annual Jackson Hole huddle later this month. Optimism has been steadily improving on the European issue as well, though the overall run of recent economic readings from that region are painting a fairly dismal picture. This morning’s growth downgrade from the Bank of England is another sign that the Euro-zone fiscal woes are taking a heavy toll on economic activities.
In earnings update, we have solid earnings reports from Dean Foods (DF - Free Report) and Macy’s (M - Free Report) this morning, while Disney’s (DIS - Free Report) results after the close on Tuesday mirrored what we have repeatedly seen this reporting season – an earnings beat, but a revenue miss. As of this morning, 65.3% of the 435 S&P 500 companies that have reported results have come ahead of earnings expectations, with a median surprise of 2.7%. Roughly the same proportion of companies (66.4%) came out with positive earnings surprises in the first quarter, but the median surprise was at 3.6%. What is materially weaker this time around relative to other recent quarters is performance on the revenue side, with 61.9% of the companies coming short of revenue expectations.

It is hard to envision the market continuing to make gains in the absence of fundamentals support – something has to give. The market has been defying problematic signs in recent day. But the party eventually comes to an end – always does. 

Sheraz Mian
Director of Research 

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