Wednesday, August 6, 2014
Stocks appear on track to start today's session in the red again,
with soft economic data out of Europe raising doubts about the
region's economic outlook. Threatening moves by Russia in its
ongoing face face-off over Ukraine are also keeping market
participants on edge. As a result, safe-haven trades into U.S.
treasuries are pushing yields to the lowest levels of the year,
offsetting Fed fears of recent days.
Italy's economy slid back into recession in Q2, and questions
remain about the French and even the German economies. Italy's
growth challenges aren't new - the country's economy has remained
in the red off and on since the global finance crisis in 2008, and
it barely moved into the green in the last quarter of 2013. Italy's
growth problems are exacerbated by a huge debt and deficit
overhang, the worst among the major Euro-zone economies. We will
know more about how the entire region did in Q2 when Q2 GDP numbers
for Euro-zone come out on August 14th, but the French economy has
effectively been stagnant since Q1 and even the German economy
seems to be losing steam.
Germany, accounting for almost a third of the region's output,
isn't at risk of following Italy and France, but recent data
indicates some loss of momentum in Q2. The weakness is particularly
notable in the country's all-important manufacturing sector, with
June manufacturing orders coming short of expectations.
What all of this boils down to is that the Euro-zone economy not
only failed to gain strength in the first half of the year, but may
actually have lost some ground. Perhaps the face-off over Ukraine,
which is threatening to heat up again following reports of Russian
troop movement, isn't so painless for the region after all. The
region's economic slide will likely make it all the more difficult
for the U.S. government to present a unified Western response to
any fresh Russian moves in Ukraine.
The stabilization in the Euro-zone economy last year has been one
of the bright spots in the global business landscape - and it has
been showing up in corporate profitability measures. The overall
tone of management commentary about business outlook in the region
has been steadily getting better - and that is the overall takeaway
from the ongoing Q2 earnings season as well. This could change,
however, if the region's outlook starts deteriorating as a result
of the Ukraine situation.
The updated Q2 scorecard, including this morning's releases from
Ralph Lauren (
), Devon Energy (
), and others shows that we now have results from 421 S&P 500
members that combined account for 89.7% of the index's total
market capitalization. Total earnings for these companies are up
+9% from the same period last year on +4.6% higher revenues, with
65.6% beating EPS estimates and 60.9% coming out with positive
As we have been stating repeatedly in this space since the start of
this reporting cycle, this is the best performance that we have
seen in more than year. This is having an effect on estimates for
the current period as well, which aren't coming down as much as had
been the case in other recent reporting cycles.
What's driving the earnings improvement? The resumption of U.S.
economic growth is definitely a big factor. But stabilization in
Europe and steady growth in China and other emerging markets have
also been factors. Hard to tell whether the Russia-Ukraine
situation could come in the way of the improving European
narrative, but that certainly remains a risk.
Director of Research
Want the latest recommendations from Zacks Investment Research?
Today, you can download 7 Best Stocks for the Next 30 Days.
Click to get this free report
RALPH LAUREN CP (RL): Free Stock Analysis
DEVON ENERGY (DVN): Free Stock Analysis Report
To read this article on Zacks.com click here.
Want the latest recommendations from Zacks
Investment Research? Today, you can download 7 Best Stocks for the
Next 30 Days. Click to get this free report