June 27: Will Positive Domestic Reports Overshadow Tapering Fears? - Economic Highlights

By
A A A

The market is feeling good again, hoping that the feared tapering decision from the Fed may not be so imminent after all. May be the market is correct in interpreting recent data, particularly the outsized revision to the first quarter's GDP growth numbers on Wednesday. But I don't see it this way, as I continue to believe that the economy has enough momentum on its own to let the Fed to take its foot off the QE paddle.

Wednesday's GDP revision was a disappointment, but that's essentially ancient history and has little relevance to what is happening at present and what could be expected in the coming quarters. This morning's in-line Jobless Claims and strong Personal Income & Spending report provide further confirmation that growth in the second quarter is on a better trajectory than was expected just a few weeks back. We will know more next week as the June non-farm payroll and ISM data comes through, but a steady stream of recent economic readings have been showing that budget sequester and tax rate changes from earlier this year have had a less dampening effect than earlier feared. The market's inability or unwillingness to read the Fed correctly is the source of all volatility in the market at present and the issue will likely not go away any time soon.

The Fed watch promises to be the dominant theme this summer, but the start of the Q2 earnings in a few days could potentially spotlight a key vulnerability for the market. Expectations remains low for earnings growth in Q2, with total earnings for companies in the S&P 500 expected to be down -0.3% from the same period last year, on -0.5% lower revenues and essentially flat margins. This is sharp drop form the roughly +4% Q2 earnings growth expected in early April. The growth picture becomes even more underwhelming when Finance is excluded from the tally - Finance is expected to have another strong quarter.

Low expectations mean an easy enough hurdle rate for companies to jump through. But we have become accustomed to roughly two-thirds of the companies beating earnings expectations anyway. It will be interesting to see how top-line surprises come through in Q2, particularly after the unusually weak revenue results in Q1. Guidance is always important, but it has assumed even more significance this time around given the elevated expectations for the second half of the year and next year. Earnings growth was less than +1.5% in the first half of 2013, but is expected to ramp up to +9.5% in the second half.

Importantly, the growth expectations for the second half of the year are not due to easy comparisons - the level of total earnings in the 2013 Q3 and Q4 each represent new all-time high records. My sense is that estimates need to come down in a big way. The market hasn't cared much in the recent past about negative revisions as estimates have come down as aggregate earnings estimates have been coming down for over a year now. But if we are entering a post-QE world, as I believe we are, then it would be difficult to overlook negative earnings estimate revisions.



To read this article on Zacks.com click here.

Zacks Investment Research




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 , Economy

Referenced Stocks:

Zacks.com

Zacks.com

More from Zacks.com:

Related Videos

Stocks

Referenced

Most Active by Volume

33,110,376
  • $113.99 ▲ 1.77%
25,034,179
    $17.98 unch
24,486,872
  • $7.41 ▲ 2.07%
20,864,535
  • $7.39 ▼ 2.76%
18,600,501
  • $8.30 ▼ 0.36%
17,530,211
  • $8.14 ▲ 3.17%
17,299,208
  • $93.79 ▲ 2.74%
14,669,760
  • $25.78 ▼ 0.19%
As of 12/26/2014, 04:15 PM


Find a Credit Card

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