On Wall Street, vague feelings of optimism about the economy
have given way to specific fears of judgement day. The S&P 500
lost 1.71 percent Tuesday alone, and is down 3.47 percent already
in April. In the process, falling stock prices have dragged bond
yields down, which has ominous implications for
savings accounts
.
Judgement day in this case is the day each publicly-traded
company has to report its first quarter 2012 results. The season
for those earning reports is about to begin, and investors are
concerned that these results may not live up to the expectations
built in to stock prices. It's becoming the recurring theme of this
economic recovery
: Somehow, every momentary improvement never seems to quite deliver
on expectations.
Great expectations
From December 31, 2011 to March 31, 2012, the S&P 500 rose
by an impressive 12 percent. However, bottom-up earnings estimates
suggest that operating earnings for the quarter are going to be
flat.
This isn't entirely unusual. Formal earnings estimates often
don't keep up with changing outlooks for companies in the stock
market. However, the pullback in prices suggest that expectations
got too far ahead of what the actual earnings are likely to be.
Investors are concerned that when judgement day comes, earnings
won't be able to support stock prices.
Judgement day
In terms of earnings reports, the date of judgement day may vary
for each individual company, but there is a season -- roughly over
the next month -- in which first quarter results will begin to
emerge. Quarterly reports should be somewhat routine, but with a
persistently fragile economic recovery, they take on a pivotal
feeling at this particular time. By the time earning season is
over, two key questions will be answered:
-
Will macroeconomic developments translate into actual
earnings growth?
Recent months have seen a series of positive big-picture signals,
from decent fourth-quarter GDP growth to encouraging employment
results. The unanswered question is whether these broadly
positive signs will translate into actual earnings momentum for
U.S. companies. A somewhat disappointing
March jobs report
has cast a new shadow over the macroeconomic mood, and the
initial look at first-quarter GDP won't be available until the
end of this month.
-
What will be the ripple effects of a setback in
stocks?
As stock prices have fallen, they've pulled 10-year bond yields
back below 2 percent. That's a discouraging sign for CDs, savings
accounts, and money market accounts. Deposit rates may not fall
again because they never got the chance to rally, but don't
expect them to rise if stock earnings disappoint.
There can be a fair amount of hype -- both positive and negative
-- associated with stock price movements. However, as the release
of earnings reports draws nearer, the whispers and the rumors tend
to move closer to the truth. That's why the recent pullback in
stocks seems so ominous -- it has the feel of harsh reality about
it.