PMC Market Commentary: May 9, 2014
A Macro View – Sideways Continued
Earnings season is now largely complete, and for those investors hoping that this first 2014 wave of corporate earnings would provide sharp clarity, the past weeks have surely been disappointing. There were few dramatic misses from major companies, and few stellar reports that exceeded expectations.
As of the first week of May according to FactSet, nearly 400 of the S&P 500 companies had reported their results, and of these nearly 75% beat estimates for earning and more than half for revenue. The total growth in earnings is hovering at around 1.5%, which is nothing stellar but at least has the virtue of well surpassing very negative consensus that had forecast a decline in overall earnings. In addition, even at a muted 1.5%, earnings growth remains better than U.S. GDP growth for the quarter.
Part of how markets react to earnings has to do not with the results themselves but how the results matched the expectation of analysts and the Wall Street community. In the past years, and largely since the 1990s, analysts have been very conservative in their estimates, as have companies and their CFOs. “Better to be pleasantly surprise than painfully disappointed” seems to be the mantra. And so, while it is true that companies this quarter are “beating estimates,” that is largely because estimates are so modest that beating them is not especially arduous.
But while companies are doing a shade better than those conservative estimates, the fact remains that overall, the earnings and revenue picture is largely static just now, along with the markets themselves and most national economies. Few are reporting business challenges that stem from economic conditions per se (except those that attempt to fob off their poor performance by, de facto, blaming the consumer). Most are indicating the new sharp growth is hard to find in most developed parts of the world.
Bond markets, meanwhile, are sanguine. They are taking the cue from a Federal Reserve chaired by Janet Yellen that may be ending quantitative easing but still sees the overall U.S. economy and banking system as needing very loose monetary policy. Yields remain exceedingly low in U.S. debt, which signals that bond markets do not expect any sudden change or improvement to the slow rate of growth. In Europe, European Central Bank (ECB) head Mario Draghi has even been mulling in public the idea that the European Union is more likely imperiled by deflation than inflation.
In April, there was sell-off in beta parts of the equity market such as new tech and biotechnology. That led more to a rotation of sectors than to serious equity declines. Whether or not that has fully run course, other sectors have been remarkably resilient.
In short, little has happened to force markets out of their groove. There will be little dramatic new information in the coming weeks, and save for a severe geopolitical crisis over Russia and the Ukraine or somewhere else, there is little on the immediate horizon to alter that thoroughly dull glide path.
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