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The Bernanke Rally Continues

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Thursday, May 2, 2013

The stock market today will likely see a partial reversal of Wednesday’s sell-off, with the interest rate cut by the European Central Bank (ECB) as a key contributor to the swing. But even more significant than the long-expected ECB decision is the persistent market behavior where investors view every sell-off as a buying opportunity.

This morning’s line-up of economic data – Jobless Claims, Trade Deficit, and Productivity – is in the positive to neutral category. The Jobless Claims data particularly is unusually positive, though it has little relevance to the non-farm payroll report coming out Friday morning. But even negative economic data in recent days has done little to disrupt this market’s momentum. Investors see growing evidence of economic weakness as a guarantee of continued Fed support. This morning’s ECB rate cut announcement and Wednesday’s Fed statement clearly show that investors can count on continued supply of cheap money.

We will continue to struggle with making sense of this market’s behavior, but we can’t forget that we are still in the midst the Q1 earnings season. Including this morning’s earnings releases from General Motors (
(GM - Free Report) ), Cardinal Health ((CAH - Free Report) ), Kellogg ((K - Free Report) ) and others, we now have Q1 earnings reports from 380 S&P 500 companies that combined account for 81.1% of the index’s total market capitalization.

Total earnings for these 380 companies are up +3% from the same period last year, with 67.4% beating earnings expectations. Revenues are down -1.7%, with only 38.7% of the companies coming ahead of top-line expectations. The median surprise is +3.3% on the earnings side and negative -0.4% on the revenue side thus far. The +3% earnings growth rate is comparable to what this same group of companies achieved in 2012 Q4 and preceding few quarters, though the revenue performance is decidedly on the weak side. The composite growth rate for Q1, where we combine the results of the 380 companies that are out with the 120 still to come, is for +1.4% growth in earnings on -1% lower revenues.

This earnings performance is not consistent with a stock market in record territory. But it’s not earnings and economic fundamentals driving this rally – it’s cheap money. As long as that policy remains in place, investors can afford to overlook issues like earnings and economic data.

Sheraz Mian
Director of Research

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