The consensus narrative for the market's loss of momentum puts
the blame on renewed Taper fears. This would make sense only if
one started with the assumption that the market wasn't pricing in
some sort of Taper action later this year all along. But unless
Mr. stock market was out vacationing on a remote island the last
few months, it is hard to imagine anyone not confronting the
Taper question one way or the other.
My sense is that it isn't renewed Taper fears, but rather a
realistic assessment of ground realities that is prompting
investors to get cautious. The most important of these reality
checks is the 'iffy' earnings outlook emerging from the Q2
earnings season. The market's strong gains thus far needed to be
confirmed by momentum on the earnings front. But we are
witnessing is the opposite of what should be happening at this
Does the corporate earnings picture emerging from the Q2
earnings season justify a market making fresh al-time highs day
after day? It may sound like a rhetorical question, but it
Estimates for Q3 have been falling like a rock as the Q2
reporting season has moved towards the finish line. But consensus
expectations still reflect double-digit growth rates in Q4 and
2014. Given what we have heard just in the last couple of days
from the likes of
) and many others before them, it is time to scale back those Q4
and 2014 expectations. The market has seen what has happened to
Q3 estimates and can easily foresee what is in store for
estimates for the outer quarters.
It is hardly surprising that investors are skittish as they
lose confidence in current consensus earnings estimates,
particularly in a backdrop of rising treasury yields. Yields are
still low by historical standards, but I give no credence to the
claims that the jump in 10-year yields from roughly 1.6% in May
to the current roughly 2.8% should have no stock market impact.
This morning's good enough Housing Starts and Permits data shows
that the housing Recovery has been able to sustain itself despite
the rising rates. But it probably doesn't make sense to assume
that rising interest rates will have no impact whatsoever on the
Market optimists continue to hold out hopes for earnings
growth ramp up towards the end of the year and next year - that's
why estimates for Q4 and next year still reflect double-digit
growth rates. They can justifiably point towards the improving
macro backdrop like Thursday's sharp drop in Jobless Claims data,
and even some tell-tale signs of green shoots in Europe. But if
we don't see any evidence of positive earnings momentum, as has
been the case thus far, then the bulls would need to come up with
a more plausible justification for the market's record level.
With the Fed getting ready to get out of the QE business,
irrespective of whether the Taper comes next month or later this
year, stocks need earnings power to justify recent lofty levels.
We haven't seen that thus far. In fact, management guidance on
the Q2 earnings calls, not just from Wal-Mart and Macy's, but
across the board from many companies in different sectors, are
pointing towards an earnings picture that is significantly weaker
than what investors are hoping for.
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