Wednesday, April 30, 2014
The shockingly weak GDP report threatens to steal the glow from
) jobs report and a super-busy docket of Q1 earnings reports. But
it will be a mistake to read too much into the weather-impacted
GDP reading, which is nevertheless subject to two more revisions.
The ADP jobs tally came in better than expected, with April jobs
ahead of estimates and the prior month's tally revised higher,
reconfirming expectations that the U.S. economy is steadily
shaking off the effects of this year's winter. This morning's
other key economic reading - the first look on Q1 GDP - showed
how much of a restraint this year's winter put on the economy,
with the economy essentially grinding to a halt in the first
quarter of the year.
The 'headline' GDP growth in Q1 turned out to be shockingly lower
than estimates, with business spending (down -2.1% vs. up +5.7%
in 2013 Q4), exports (-7.6% vs. +9.5%) and contraction in
inventories dragging down growth in the quarter. As weak as the
GDP report was, it probably makes sense not to draw any firm
conclusions from its 'noisy' moving parts. The strong ADP report,
on the other hand, is pointing towards the possibility of a
positive surprise from Friday's government jobs report.
The economy and jobs are in the spotlight today, but we also have
a super-busy docket of Q1 earnings reports, with more than 250
companies (including 28 S&P 500 members) reporting results
today. Including this morning's reports from
) and others, we now have Q1 results from 309 S&P 500 members
that, combined, account for almost 68.5% of the index's total
market capitalization. Total earnings for these 309 companies are
up +2.1% from the same period last year on +3% higher revenues,
with 68.6% beating EPS estimates and 47.8% coming out with
positive revenue surprises.
As with today's GDP report, not much growth was expected from the
Q1 earnings season as estimates had come down sharply before the
reporting cycle got underway. But we saw the resumption of some
momentum in the economy in the industrial production, retail
sales, consumer confidence and other March data that came out
Last month's labor market readings showed a similar trend and
today's ADP report and Friday's government jobs reading will
likely confirm that the trend gained pace in April. Given this,
it is reasonable to buy into the consensus view that Q1 GDP
growth will be the low point for the year and the momentum will
notably improve from Q2 onwards.
But we aren't seeing anything comparable on the earnings front.
The trend on the earnings front continues to be to the downside,
with negative guidance from management teams prompting estimates
for Q2 to steadily to come down. Total earnings for the S&P
500 are expected to be up +4.2% in Q2, down from the +5.5% growth
rate that was expected about a month ago.
This is a modestly slower pace of negative revision relative to
what we encountered in the comparable period in Q1, but the
difference is likely a function of the marginally negative role
that weather played in bringing down Q1 estimates. Adjusting for
the weather effects in Q1, the revisions trend is still to the
downside, hardly a reassuring backdrop for the stock market.
Director of Research
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