Follow Last Week's Narrative (For Now) - Ahead of Wall Street

By Zacks | July 07, 2014 AAA

Monday, July 7, 2014

With not much on the economic calendar this morning, last week’s strong jobs report will likely remain the dominant theme in today’s session as well. Attention will soon shift to the second quarter earnings season, with Alcoa’s (AA) unofficial kick-off to the reporting cycle after the close on Tuesday.

The sharp drop in the U.S. unemployment rate, now at its lowest level since just before the financial crisis, and the improving pace of job creation bodes well for the economy in the second half of the year.  The question is whether this improving backdrop will force the Fed to raise rates than would otherwise be the case.

We will likely not find anything new in the minutes of the Fed’s June meeting that are coming out on Wednesday. But if the pace of job creation remains elevated, then the Fed will have to step up and prepare the markets for that day. With yields on longer-dated treasuries nowhere near what would be considered ‘normal,’ the market has a lot of catching up to do.

The Q2 earnings season won’t ramp up till next week, though this week’s reports from Alcoa and Wells Fargo (WFC) will add to the early reports from the likes of FedEx (FDX), Oracle (ORCL) and others. Estimates for Q2 have come down, largely in-line with the negative revisions trend that has been in place for quite some time.

But more important than the growth rate in Q2 is the outlook for the second half of the year and beyond. The consensus expectation is for a material growth ramp-up in the second half of the year to +8.5% total earnings growth from the first half’s +2.1% pace.

Corporate guidance, which has persistently been on the weak side in recent quarters, will determine whether those expectations will hold or will need to come down. Thursday’s strong jobs report raises hopes that guidance this time around will start reflecting this improving backdrop. We will find soon enough if that is the case.

Sheraz Mian
Director of Research

 
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