To the surprise of many observers, stocks have survived a series of recent challenges. As Q214 earnings reports starts begin, the questions has changed:
Can strong corporate earnings spark a renewed rally in stocks?
Prior Theme Recap
Two weeks ago I expected that speculation about a market correction would dominate the time before earnings season began. This proved to be accurate, especially when assorted news items were linked to a market decline of more than 50 bps. It does not take much these days to get the financial media excited, e.g. The Dow is down triple digits!! Whoever happens to be on TV at the moment is asked to “explain” the decline.
Naturally we would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react. That is the purpose of considering possible themes for the week ahead.
This Week’s Theme
The stock market has successfully shrugged off a series of recent challenges, including the following:
- A Portuguese banking “crisis”;
- A front-page New York Times story explaining that all investments are “expensive”;
- A streak of weak economic data;
- A series of geo-political concerns – Ukraine, Iraq, and Gaza.
- Some advice on stocks from Fed Chair Janet Yellen. (See Steven Russolillo’sWSJ piece and Neil Irwin at The Upshot to get some grounding on this issue!)
Doug Short always captures the week in a single great chart. This one shows the resilience last week.
The chart would be even more dramatic if it included overnight futures trading on Thursday. Those of us sneaking a peek or two in the wee hours noted that futures were down “triple digits” on the Dow. More on that subject in this week’s Final Thought.
After surviving these various tests, it may be time to consider the upside. Will earnings growth be enough to propel stocks higher?
Barron’s cites “earnings based optimism” as the source of strength.
Eddy Elfenbein notes that estimates have come down less than we usually see, and also warns about the deviations in various earnings sources.
Brian Gilmartin confirms Eddy’s observation and also notes that we are seeing some revenue beats as well this quarter.
I am not seeing major sources projecting that earnings will be poor, but feel free to highlight such forecasts in the comments. I have some final thoughts, as usual, but focused more on world events than earnings.
First, let us do our regular update of the last week’s news and data. Readers, especially those new to this series, will benefit from reading the background information.
Last Week’s Data
Each week I break down events into good and bad. Often there is “ugly” and on rare occasion something really good. My working definition of “good” has two components:
- The news is market-friendly. Our personal policy preferences are not relevant for this test. And especially – no politics.
- It is better than expectations.
The Good
There was some important good news last week.
- Sea container counts improve again. Steven Hansen notes the recent improvement and provides a package of charts illustrating the longer trends.
- Steven Hansen notes the recent improvement and provides a package of charts illustrating the longer trends.Bespoke’s beat rate chart tells the story.
- Yellen’s Congressional testimony was market-friendly. Reassuring and no missteps. Whether or not you agree with the plan, investors should take it for what it is. Here are four good takes on the story.
- Health care spending cost forecasts are improving. The non-partisan CBO shows health care taking a lower share of GDP than projected a few years ago. Health policy remains a hot-button political issue. Everyone on all sides is either assigning blame or taking credit. As investors, we should be interested in facts – especially if worried about the budget deficit.  Matthew Yglesias at Vox reviews data from a Brookings study. Here is a key chart:
The CBO still sees the “risk of a fiscal crisis” without policy changes.
