Economic Growth: Foggy - Ahead of Wall Street

By Zacks | May 21, 2014 AAA

Wednesday, May 21, 2014

Stocks appear poised for a positive open today. But with the Q1 earnings season now behind us and not much on the economic calendar today, the overall tone of today’s session is unlikely to be any different from the lackluster pattern we have been seeing lately.p> Minutes of the Fed’s last meeting coming out this afternoon could move the markets, but they are unlikely to carry anything new beyond what the Fed officials have already been sharing with the markets.

On the earnings front, we are almost at the end point of the Q1 earnings season. Including this morning’s reports from Target (TGT), Tiffany (TIF), Hormel (HRL) and others, we now have Q1 results from 477 S&P 500 members. Total earnings for these companies are up +1.4% from the same period last year on +2.7% higher revenues, with 68.6% beating EPS estimates and 51.7% coming out with positive revenue surprises.

It has overall been a weak season, with growth hard to come by and most companies guiding along the lines of this morning’s guidance from Target – lower. As a result, we didn’t see any change or improvement on the estimate revisions front, which have been persistently on the negative side for almost two years now.

The Q1 weakness came as no surprise to this market and is not the reason for the market’s double-mindedness; it’s the uncertain future outlook. After all, market prices reflect future expectations, not current conditions. With margins already in record territory, the only way the earnings picture will change in any meaningful way is if we start seeing stronger revenue growth, which will happen if the global economy starts growing again.

Consensus expectations for a material turnaround in the U.S. economic and earnings pictures in the coming periods, particularly the second half of the year and beyond, lack in conviction. And there is good reason for that tentativeness. The U.S. economy has undoubtedly started shaking off the winter blues, with GDP growth in the current quarter expected to be in the +3% vicinity after the flat read in Q1. But the overall picture is mixed, with retails sales, housing, and even the factor sector not showing the expected bounce-back.

What all this means is that visibility about the economy’s growth trajectory in the coming periods is far from clear. The downtrend in treasury bond yields despite the recent broadly favorable economic data reflects this lack of confidence about future growth. The stock market is unlikely to get out of its recent tentative pattern unless these clouds lift.

Sheraz Mian
Director of Research

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