If you're like either of us, as the Easter holiday winds down, you're wiping remnants of chocolate eggs and assorted candies from your face and getting ready to tackle the trading week ahead. The skinny on last week's abbreviated market was it was more of the same, and by that we mean a stream of disappointing economic indicators. Getting a tad more granular, last week's disappointments centered on spending, manufacturing and jobs. Last week also closed the books on the at-best mixed March quarter, and started April off in the red.
Friday's market closure for the Easter holiday brought an interesting wrinkle to the mix, largely because there was no market reaction to an utterly disappointing March employment report. Take your pick from the weakest number of jobs being created in several quarters to big negative revisions for January and February data or the shortened number of hours worked in March and, once again, more people falling out of the labor force than the number of jobs created. Our overall grade for the report was a D, and for the life of us, we are simply bewildered at how some economists, like Mark Zandi, chief economist at Moody's Analytics ("underlying job growth remains strong"), tried to put lipstick on this report rather than call it as the disappointment that it was.
As bad as the March jobs report was, there is a silver lining to it -- in addition to the current deflationary environment, the Fed has another reason to hold off raising interest rates. Just as it did with the recent Fed policy statement, the stock market should take positively to this realization Monday when April trading resumes. We continue to see the first such move by the Fed after September at the soonest and, even then, it looks to be just a 25-basis-point move. We recognize that when it happens it will spook many, but even after such a move, rates will remain extremely low compared to historical levels. This has us thinking that where interest rates are concerned, the real questions surround successive rate hikes and the upcoming presidential election -- topics that will come to the forefront in 2016. Near-term it means big dividend-paying stocks, like Physicians Realty Trust (DOC), Alexandria Real Estate Equities (ARE), HCP Inc., (HCP), Realty Income (O), (which just joined the S&P 500) and others will remain in vogue for some time.
Turning to the week ahead, with only a handful of March quarterly earnings reports and a comparatively slower economic data calendar than last week, we'd call it the calm before the storm. In other words, don't let Monday's potentially weak-jobs-data-fueled market movement get you overly comfortable and complacent. Wednesday has Alcoa (AA) cutting the ribbon to the March quarter's earnings, but in total, only a handful of S&P 500 companies are reporting their quarterly results this week: the aforementioned Alcoa, Walgreens Boots (WBA), and Bed Bath & Beyond (BBBY) to name a few. Just as a submarine commander has to be wary of a mine-filled harbor, investors need to watch out for earnings preannouncements.
Before the pedal hits the metal for earnings, let's take stock of where the market stands. As of Thursday's close, the S&P 500 was trading at 17.2x on expected 2015 earnings of $120.06 per share. As we've noted over the last several weeks, earnings expectations for the first quarter and first half have continued to sink throughout Q1 2015.
If you have the ability to recall as far back as -- gasp! -- late December, the estimated earnings growth rate for Q1 2015 was +4.3%. As of Thursday, the revised rate stood at -4.6%. If the index does indeed report a year-on-year earnings decline for the March quarter, it will be the first one since Q3 2013.
Let's be clear: It isn't just the cost side of the equation producing negative earnings revisions, analysts are also expecting year-over-year declines in revenue for the first half of 2015 as well. For Q1 2015 and Q2 2015, analysts are now predicting revenues to fall by 2.7% and 3.3%, respectively. Much like earnings expectations, there has been a sea change compared to late December, when the consensus view called for projected revenue growth of 1.6% and 1.0% for these same two quarters.
Looking past the first quarter to the first half of 2015, expectations now call for earnings to drop 2.3% year over year. For 2015 in full earnings are slated to grow just 2.4%, but let's not confuse earnings per share growth with real profit growth. As we've pointed numerous times over the last several months, earnings-per-share figures are being boosted by the pervasive use of stock buyback plans by more than 400 of the S&P 500 companies. During the March quarter, a number of high-profile buyback programs were announced and, frankly, we see no slowdown until the Fed gets at least a few interest rate hikes under its belt -- that may be 2016, but we're not ready to call that just yet. Would the Fed raise interest rates in an election year?
Where are we going with this? In a word, volatility, as investors link upcoming earnings results with current stock valuations.
Given a confluence of factors -- winter weather, the strong dollar, port closures, labor disputes, and so on -- that companies such as Monsanto (MON), Oracle, (ORCL), Adobe Systems (ADBE), AutoZone (AZO), General Mills (GIS), Carnival (CCL) and others can point to, this upcoming earnings season is bound to be more of a roller coaster than the last few. Even though earnings expectations have come down, data from FactSet shows nine of the 10 sectors have forward 12-month price-to-earnings ratios that are above their 10-year averages. We can understand this for the energy sector, which has seen its earnings forecasts sliced and diced, but it's the overall mismatch between earnings growth and stock valuations that have us thinking it would be smart to have your helmet and pads nearby when earnings kicks into high gear.
Here's the thing: It's becoming increasingly apparent that the Fed is not going to raise interest rates until late 2015 at the earliest, which to us means any upcoming pullback is an opportunity to buy well-positioned companies that have demonstrative tailwinds. If you are looking for more insight into the Fed's thinking, we recommend that on Wednesday you read the Fed minutes behind its March 18 policy statement. (If you missed that statement, you can read it here.)
Below is a more detailed look at what's coming in the week ahead. Be sure to check back for our midweek column, in which we will dish on the first half of the trading week and other key matters and thoughts, as well as how to play it all.
Economic Calendar
Monday, April 6 - Friday, April 10
6-Apr Gallup US Consumer Spending Measure
6-Apr ISM Services
6-Apr Labor Market Conditions Index
7-Apr JOLTS - Job Openings
7-Apr Consumer Credit
8-Apr MBA Mortgage Index
8-Apr Crude Inventories
8-Apr FOMC Minutes
9-Apr Initial Claims
9-Apr Continuing Claims
9-Apr Wholesale Inventories
9-Apr Natural Gas Inventories
10-Apr Export Prices ex-ag.
10-Apr Import Prices ex-oil
10-Apr Treasury Budget
Earnings Calendar
Monday, April 6
ZEP Zep Inc.
Tuesday, April 7
GBX Greenbrier Cos
HOFT Hooker
ISCA Intl Speedway
PLAY Dave and Buster's Entertainment
Wednesday, April 8
AA Alcoa
BBBY Bed Bath & Beyond
GPN Global Payments
RAD Rite Aid
RPM RPM Int'l
WDFC WD 40
Thursday, April 9
APOG Apogee
DDC Dominion Diamond
RELL Richardson
RT Ruby Tuesday
STZ Constellation Brands
WBA Walgreens Boots
Friday, April 10
PSMT Pricesmart
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