Wednesday, July 11, 2012
The most important item on today's calendar is the release of
the Fed's June meeting minutes later this afternoon which will give
the market an opportunity to handicap the odds of further Fed
support in the coming days. The uncertain domestic economic scene
following the recent run of soft economic readings has increased
the market's clamor for more QE and today's minutes will likely
show that the Fed remains willing to oblige should conditions
remain downbeat.
While most expect the Fed to come through with more QE at some
stage if the economy remains weak, hardly anyone believes that a
new round will materially change the trajectory of economic growth.
What could be far more beneficial to the economy at this stage
would be decisive resolution of the Fiscal Cliff issue, but that is
unlikely to happen in this election year. As a result, the Fed is
the only game in town and they would like to be seen doing
'something' even if its utility is questionable. The election may
prompt the Fed to take an earlier action than wait for more
evidence of slowdown
The global economic growth question that had been swirling
around for a while seem to have finally caught on with corporate
earnings as well. The current earnings pre-announcement season has
provided us with plenty of evidence that ongoing synchronized
slowdown all over the world is weighing on corporate earnings. We
will know more in the coming days as the reporting cycle
accelerates, but the signs at this stage don't look very
promising.
Bellwether companies in a range of industries like
FedEx (
FDX
),
Proctor & Gamble (
PG
),
Nike (
NKE
), and
Cummins (
CMI
) have cited worldwide slowdown in demand as the reason for guiding
lower. Earnings expectations for the second quarter and full-year
2012 had been trending down even before these pre-announcements,
but we hadn't seen that much downward adjustments to next year's
estimates. It is very likely that we will see a material
acceleration in negative estimation revisions for 2013 as the
second quarter reporting season progresses. This means that the
market may have to contend with negative earnings momentum in
addition to all the other macro questions that have been weighing
on it for a while now.
Sheraz Mian
Director of Research
CUMMINS INC (CMI): Free Stock Analysis Report
FEDEX CORP (FDX): Free Stock Analysis Report
NIKE INC-B (NKE): Free Stock Analysis Report
PROCTER & GAMBL (PG): Free Stock Analysis
Report
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