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U.S. Market Grapples with European Selloff - Ahead of Wall Street

Friday, April 17, 2015

Weakness out of Europe and a couple of mixed earnings reports provide the backdrop for today's action, with the major indexes on track to start the session in the red. Next week will be big on the earnings front, with almost 150 S&P 500 members on the docket to come out with Q1 reports.

Overnight action out of European markets was unusually weak with all the major (national) stock market indexes losing ground and the German government bond yields going lower. There was no one trigger for the European sell-off. It definitely wasn't the inflation reading, which matched estimates and could even be pointing towards some stabilization that will lessen the odds of deflation in the region.

It would be a stretch to suggest that reduced deflation risk will prompt the ECB to curtail its ongoing QE program. The inflation reading this side of the pond was largely benign as well, though it did have a whiff of heat in it.

Other candidates for causing the European stock market sell-off like the Bloomberg terminals out of commission and some trading rules change out of China don't make much sense either. Let's blame it all on Greece - we can't go wrong with that. After all, markets are always on edge about the prospect of a Greek default and the noise on that front has been steadily increasing lately.

On the earnings front, we had a mixed report from General Electric ( GE ) even after stripping away the massive charges that the company had to take as part of getting rid of its big GE Capital business. The conglomerate is trying to go back to its industrial roots, but the energy piece of that industrial core didn't do that well in Q1. Results from Honeywell ( HON ) and Seagate ( STX ) this morning weren't that great, either.

Including these reports, we now have Q1 results from 59 S&P 500 members that combined account for 19.6% of the index's total market capitalization. What this means is that we now have results from almost one-fifth of the index's total market capitalization, which is a decent enough sample size to start drawing some preliminary conclusions. The Q1 Scorecard at this stage shows total earnings for the 59 index members that have reported as up +13.9% on +3.8% higher revenues, with 78% beating EPS estimates and 32.7% coming ahead of top-line expectations.

Two things stand out from these results. First , earnings growth looks pretty impressive and is an improvement over what we have seen from the same group of 59 companies in other recent quarters. But we have to thank the Finance sector for that - Bank of America's ( BAC ) easy comparisons is helping the sector growth picture, but the sector's results would be an improvement over other recent periods even without the BAC numbers. Exclude the Finance sector from the aggregate earnings growth numbers and the picture doesn't compare favorably to other recent periods.

Second , revenue beat ratios are unusually low - the 32.7% revenue beat ratio for these 59 companies compares to 53.8% in 2014 Q4 and the 4-quarter average of 61.5%. What this means is that estimates weren't low as many had started suspecting following the sharp negative revisions to Q1 estimates.

Sheraz Mian

Director of Research

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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