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The stock market today will likely see a partial reversal of
Wednesday's sell-off, with the interest rate cut by the European
Central Bank (ECB) as a key contributor to the swing. But even
more significant than the long-expected ECB decision is the
persistent market behavior where investors view every sell-off as
a buying opportunity.
This morning's line-up of economic data - Jobless Claims, Trade
Deficit, and Productivity - is in the positive to neutral
category. The Jobless Claims data particularly is unusually
positive, though it has little relevance to the non-farm payroll
report coming out Friday morning. But even negative economic data
in recent days has done little to disrupt this market's momentum.
Investors see growing evidence of economic weakness as a
guarantee of continued Fed support. This morning's ECB rate cut
announcement and Wednesday's Fed statement clearly show that
investors can count on continued supply of cheap money.
We will continue to struggle with making sense of this market's
behavior, but we can't forget that we are still in the midst the
Q1 earnings season. Including this morning's earnings releases
) and others, we now have Q1 earnings reports from 380 S&P
500 companies that combined account for 81.1% of the index's
total market capitalization.
Total earnings for these 380 companies are up +3% from the same
period last year, with 67.4% beating earnings expectations.
Revenues are down -1.7%, with only 38.7% of the companies coming
ahead of top-line expectations. The median surprise is +3.3% on
the earnings side and negative -0.4% on the revenue side thus
far. The +3% 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 380 companies that are out with the 120 still to
come, is for +1.4% growth in earnings on -1% lower revenues.
This earnings performance is not consistent with a stock market
in record territory. But it's not earnings and economic
fundamentals driving this rally - it's cheap money. As long as
that policy remains in place, investors can afford to overlook
issues like earnings and economic data.
Director of Research