Stock market investors didn't care much about the ugly Q1 GDP
picture, which progressively got worse at each revision, in the
hope that the one-off weather-centric restraints in that period
will be replaced by a strong rebound in the current and following
quarters. This reassuring narrative helped the market continue
making gains, pushing the broad indexes into record
territory. Some of that optimism has no doubt been confirmed by
positive economic data, indicating a growth rebound in the current
But as Thursday's consumer spending data shows, the magnitude of
the Q2 rebound is a lot less robust than consensus market
expectations. As a result, estimates for GDP growth have started
coming down and the negative revisions trend could gain more
momentum in the coming days if data continues to come on the soft
side. We will start seeing monthly economic data for June from next
week onwards, starting with Tuesday's ISM survey and Thursday's
June jobs read.
Beyond next week, the Q2 earnings season will take the spotlight.
Estimates for Q2 have come down, largely in-line with the negative
revisions trend that has been in place for quite some time, with
the current expected growth rate of +2.9% down from +5.5% at the
start of the quarter. Some of the initial Q2 reports from companies
with fiscal quarters ending in May from the likes of
) and others present a mixed picture.
At stake is not so much the actual growth in Q2, which most likely
be better than the currently expected +2.9%, but the outlook for
the second half of the year and beyond. The consensus expectation
is for a material growth ramp up in the second half of the year to
+8.5% total earnings growth from the first half's +2.1% pace.
Corporate guidance, which has persistently been on the weak side in
recent quarters, will determine whether those expectations will
hold or will need to come down. To that end, this morning's
) pre-announcement could very well be a sign of things to come.
Is it complacent behavior on the part of investors to keep
rewarding stocks despite the less than stellar economic and
corporate earnings fundamentals? Regular readers know where I stand
on that issue, but my sense is that others will start reaching that
same conclusion in the not-too-distant future.
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