Monday, May 4, 2015
Stocks appear on track to start today's session modestly in the green, with overnight action out of Europe helping sentiment. The major indexes have been stuck in a narrow range lately, with a combination of Fed-centric uncertainty and weak earnings keeping sentiment in check.
On the data front, Friday's soft factory sector ISM reading for the U.S. failed to reassure us about the economy's growth trajectory in the current period. The expectation is that growth was held back in Q1 by a combination of bad weather and logistical bottlenecks like the West Coast port closures. If that is the case, then we should start seeing some signs of Spring thaw in the data, hopefully in Friday's government jobs report. The economic picture isn't that reassuring beyond the U.S. shores either, with April purchasing managers survey out of Europe and Asia offering diverging paths.
Taken as a whole, the Euro-Zone readings show some improvement in the landscape, though Asia's outlook is unmistakably cloudy. The Chinese economy in particular has yet to bottom, with the HSBC PMI reading showing further loss of momentum even as the official survey showed some stability. Stocks in China and the other broader region don't seem particularly concerned about the soft economic readings, as they see weak economic readings guaranteeing more stimulus from the Chinese authorities.
On the earnings front, we have the last big busy week on the Q1 reporting docket, with over one thousand companies reporting results, including 84 S&P 500 members. Including this morning's reports from Comcast ( CMCSA ), Tyson Foods ( TSN ) and others, we now have Q1 results from 371 S&P 500 members that combined account for 82.3% of the index's total market capitalization. Total earnings for these 371 index members are up +5% on -3.7% lower revenues, with 66.1% beating EPS estimates and only 43.8% coming ahead of top-line expectations.
As we have been saying repeatedly in this space since the start of this reporting cycle, this is weak performance relative to what we have seen from the same group of companies in the recent past. The revenue weakness particularly stands out, with not only growth non-existent, but an unusually higher proportion of companies missing top-line estimates as well. The picture would still be weak relative to other recent periods even if we adjust the Q1 results for the opposing effects of the Finance and Energy sectors on the aggregate results.
The composite or blended picture for Q1, where we combine the actual results from the 371 S&P 500 members that have reported results to estimates for the remaining 129 index members, is for total earnings growth of +1.8% from the same period last year on -3.1% lower revenues. Stronger growth from the Finance sector has helped the aggregate (composite) growth pace. Excluding the Finance sector, total Q1 earnings would be down -1.9% on -3.8% lower revenues. On the other hand, the Energy sector has been a drag on growth this period. Excluding the Energy sector, the composite Q1 growth improves to earnings growth of +4.1% on +2.2% higher revenues.
Director of Research
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