Near Term Mixed, Longer Term Still OK - Ahead of Wall Street

By Zacks | May 22, 2014 AAA

Thursday, May 22, 2014

Pre-open sentiment is pointing towards a modestly positive open for stocks, even though the overall tone of this morning’s economic and earnings data is at best mixed. Of this morning’s data, we got a positive-looking factory sector reading out of China and a bigger-than-expected jump in U.S. initial Jobless Claims, with Existing Home Sales numbers coming out a little later.

China’s preliminary manufacturing PMI survey for May from the HSBC Bank showed improvement from the April level, likely indicating some stabilization in this key sector in response to the government’s mini-stimulus measure. Importantly, the 49.7 PMI reading for May, up from April’s 48.1 level, still leaves the country’s manufacturing sector in contractionary territory. The May improvement notwithstanding, it’s hard to tell whether the government’s latest stimulus measures have been helpful to creating bottoming process for the economy’s growth outlook.

The government’s long-term plan to reduce reliance on the traditional growth avenues of investments and exports while maintaining steady economic growth is coming under pressure. The issue is particularly acute in the country’s property sector, which has started losing ground after absorbing a big part of investments in recent years. Given all these cross currents, today’s positive looking data by itself may not be enough to clear the air about China’s outlook.

In corporate news, Best Buy (BBY) and Sears Holding (SHLD) provided weak guidance in their Q1 earnings reports, while Williams-Sonoma (WSM) came out with better-than-expected results. Today’s earnings reports are broadly in-line with what we have been seeing throughout the Q1 earnings season that is slowly moving towards the finish line.

The bottom line on the earnings front has been that growth is hard to come by and companies are continuing to guide lower for the current and coming quarters. As a result, estimates for the current period have come down, along the lines of the trend that has been in place for almost two years now.

Investors are looking for a turnaround in the earnings picture in the coming quarters, starting in the second half of the year, driven by a rebound in the U.S. economy and a steadily improving economic outlook for the global backdrop. Recent data is showing that the U.S. economy is coming out of the Q1 freeze, notwithstanding this morning’s Jobless Claims jump.

That said, the weak momentum in some key areas of the economy like housing, manufacturing and even retail sales may be pointing towards a less robust growth trajectory beyond the current quarter. But for now at least, investors appear to banking on stronger growth in the current and coming quarters.

Sheraz Mian
Director of Research

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