As we called out in last week’s Monday Morning Kickoff, the ensuing week was one of the busiest we’ve seen in some time given the velocity of corporate earnings, the start of the month economic data, the Fed’s May FOMC meeting and the now what can only be called the usual “unusual†happenings in Washington. All of that even before we yesterday’s French elections and the latest pertaining to the oil markets, which saw oil prices fall to the lowest level since before the OPEC-led production cuts last week. Quite the fire hose to be drinking from.
As we enter what will hopefully be a slower week at least from a data point of view, today we’ll break it all down and decipher what it means for the stock market, so keep reading . . . we wouldn’t want to spoil it up front, but don’t worry we’re not going to make you sift through the end credits for the answer like we hear is the case with Marvel’s Guardians of the Galaxy 2.
Energy & Consumer Discretionary Leading the Earnings Beat
So far, more than 2,000 companies reported over the last 10 market days, bringing the total number of S&P 500 companies to just over 80%. In the coming weeks, we’ll start to hear from retailers and others that have an April quarter end. Based on what we’ve seen from that 80 percent, which in our view is a meaningful sample, 75 percent beat the mean EPS estimate and 66 percent of S&P 500 companies have beat the mean sales estimate. That beat is being led primarily by two areas — Energy and Consumer Discretionary, to use the typical Wall Street lingo.
The rebound in Energy earnings should come as no major surprise, given the year over year rise in oil prices. The rebound in Consumer Discretionary, however, is somewhat surprising given the tepid Retail Sales data we’ve seen over the last several months. We suspect that as more retailers report earnings in the coming weeks (most tend to have an end of January year-end to account for year-end holiday sales, which means most just closed their books on the first quarter of 2017 at the end of April), we’re likely to get a somewhat different view on consumer discretionary spending. Even though 1Q 2017 earnings have come in a bit better than expected, we continue to see a downward move in expectations for the current quarter, and there is a high probability those soon to be had retail earnings could put a further crimp in 2Q 2017 expectations.
That’s the good news.
The not so good news is for the current quarter, 58 S&P 500 companies have issued negative EPS guidance vs. 25 that have issued positive EPS guidance, and we’ve continued to see expectations for the current quarter trickle lower. Even as that has happened, the S&P 500 closed last week at a new high following a better than expected April Employment Report (more on that in a bit) and a rebound in oil stocks that followed comments by Saudi Arabia indicating that Russia is ready to join OPEC in extending supply cuts. With oil prices falling back to pre-OPEC led production cuts last week, we’d argue OPEC’s initiative has thus far been a major disappointment, thwarted by production from countries that have not agreed to the cut, including the US. Here’s the thing, we continue to see the US rig count climb, while more data points to a continued sluggish US economy.
