Following the elusive earnings indicator Weekly market view from LMK Wealth Management. Reprinted with permission
Stocks ended the second week of the new quarter on a high note, giving the Dow its first close over 18,000 for the month.
Investors took confidence from some major corporate deals as well as fresh data that suggests the economy is still on track. For the week, the S&P 500 added 1.70%, the Dow grew 1.66%, and the NASDAQ gained 2.23%. With earnings season in focus, investors have temporarily put Fed worries and economic issues on the back burner in favor of seeing how U.S. businesses performed last quarter.
Weak Oil, Strong Dollar
Thomson Reuters analysts predict that S&P 500 companies saw their profits decline by 2.9% from Q1 2014. Falling oil prices and a strong dollar likely chipped away at energy company earnings as well as those of firms that depend on overseas sales (and had to convert profits back into dollars).
Earnings estimates have come down sharply in recent months. In the chart below, you can see that for the past year, the trend has been for earnings expectations to start relatively high (in blue), drop significantly as the quarter proceeds (in red), and then, in three of the last four quarters, exceed expectations (in green).
Set the bar low…
Corporate managers have an incentive to set the bar low so that they can over-deliver on earnings and reap the reward as investors react positively to the news.
However, past performance is no guarantee of future return, and we're not guaranteed to see positive earnings surprises this season. The size of negative earnings revisions is unusually large as companies were forced to account for slower economic growth and volatile oil prices.
However, we can remain hopeful that the historical trend will hold. As we look toward the official start of earnings season this week, we can count on seeing some winners and losers. While energy companies will likely be hit hard by petroleum prices, financial firms and medical firms may see outsized performance. Though we can't predict the market, we can stay alert for opportunities amid the potential volatility.
- Monday: Treasury Budget
- Tuesday: PPI-FD, Retail Sales, Business Inventories
- Wednesday: Empire State Mfg. Survey, Industrial Production, Housing Market Index, EIA Petroleum Status Report, Beige Book, Treasury International Capital
- Thursday: Housing Starts, Jobless Claims, Philadelphia Fed Business Outlook Survey
- Friday: Consumer Price Index, Consumer Sentiment