Fed Hopes Keep the Rally Alive - Ahead of Wall Street

By
A A A

Tuesday, April 30, 2013

Does it make sense for the stock market to be in record territory at exactly the time when the economic and earnings data is pointing towards troubles ahead? No it does not, unless of course investors were using the weak data as a proxy for continued support from the Federal Reserve. And it is this Fed angle that lies at the core of the strong momentum in the stock market.

The Fed's two-day meeting getting underway today may not result in any fresh announcements when the FOMC statement comes out Wednesday afternoon. But the stock market will likely read any FOMC acknowledgement of downside economic risks as indicative of a longer duration for the QE program. Minutes of the March FOMC meeting appeared to indicate that a growing number of the committee members were thinking of modifying the QE program by the summer months. But the March FOMC meeting took place before we got a slew of weak economic data, indicating that a fresh Spring Swoon was on its way. As a result, the market is assigning much lower odds to any changes to the QE program this summer - and hence the stock market in record territory.

The Fed is not alone in this easy-money policy - the European Central Bank (ECB) and particularly the Bank of Japan (BoJ) are active participants in this policy. Expectations remain high that the ECB will announce a rate cut at its meeting this week, with today's tame inflation and high unemployment readings further raising those hopes. The BoJ's aggressive easing policy is likely partly at play in our stock and bond market's momentum. Treasury bond yields may be very low by historical standards, but they look 'juicy' relative to what is available to Japanese investors at home.

On the earnings front, we now have Q1 earnings reports from 295 S&P 500 companies that combined account for 69.4% of the index's total market capitalization. This includes this morning's line-up of releases from Pfizer ( PFE ) , U.S. Steel ( X ), Avon ( AVP ) and others.

Total earnings for these 295 companies are up +2.2% from the same period last year, with 66.8% beating earnings expectations. Revenues are down -0.4%, with only 38.6% of the companies coming ahead of top-line expectations. The median surprise is +3.2% on the earnings side and negative -0.4% on the revenue side thus far. The +2.2% 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 295 companies that are out with the 205 still to come, is for +1.4% growth in earnings on +0.2% higher revenues. This earnings performance would normally be inconsistent with a stock market in record territory. But these are not 'normal' times; the Fed has rigged the system. And fighting the Fed is never the best course of action.

Sheraz Mian
Director of Research



AVON PRODS INC (AVP): Free Stock Analysis Report

PFIZER INC (PFE): Free Stock Analysis Report

UTD STATES STL (X): Free Stock Analysis Report

To read this article on Zacks.com click here.

Zacks Investment 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



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Stocks , US Markets

Referenced Stocks: AVP , PFE , X

Zacks.com

Zacks.com

More from Zacks.com:

Related Videos

Quick on Your Feet
Quick on Your Feet                  
Early Entrepreneurship
Early Entrepreneurship              
Trying to Be Goofy
Trying to Be Goofy                  

Stocks

Referenced

75%
88%
78%

Most Active by Volume

48,099,947
  • $16.09 ▲ 0.50%
40,277,806
  • $102.50 ▲ 0.24%
40,236,499
  • $19.57 ▲ 2.35%
31,092,510
  • $49.75 ▲ 0.65%
30,795,218
  • $34.92 ▲ 0.78%
29,910,855
  • $3.63 ▲ 0.83%
24,019,154
  • $13.06 ▼ 0.38%
23,753,906
  • $74.82 ▲ 1.31%
As of 8/29/2014, 04:04 PM

Find a Credit Card

Select a credit card product by:
Select an offer:
Search
Data Provided by BankRate.com