Last week was a tough one for the stock market, even though several data points confirmed that the economy is shrugging off the effects of the severe winter weather. Yes, the S&P 500 put in a new high last week, but we saw a dramatic selloff on Friday, particularly on the Nasdaq. The result left both the Dow Jones Industrial Average and the Nasdaq Composite in the red on a year-to-date basis. The S&P 500 remains up 0.9% so far in 2014.
Modest economic news lies ahead of us this week -- aside from the standard weekly data, our only other significant reports will be Wednesday's Federal Open Market Committee minutes from the March Fed meeting and Friday's March producer price index. But eyes and ears will indeed be focused on the start of earnings season for the March quarter. That's right: Once again, we are about to head into that cycle of reports for several weeks. It's always a busy time, and the period we about to face is likely to be a little trickier than usual.
Let me explain why I say that.
During the first three months or so of the year, 93 of the companies listed in the S&P 500 issued negative guidance, as compared with just 18 issuing positive forecasts -- not a good ratio at all. Also, we've seen a decline in Wall Street's earnings expectations for the March 2014 quarter. In December analysts called for S&P 500 earnings to rise 4.3% in the first quarter, but in about the past 100 days, that has been revised to a projection for a 1.2% drop.
According to data from FactSet, some of the bigger negative analyst revisions have been from NRG Energy (NRG), Bank of America (BAC), Peabody Entergy (BTU), International Game Technology (IGT), FedEx (FDX) and Urban Outfitters (URBN). Compensating for those names, analysts have also bumped up their first-quarter forecasts for Lennar (LEN) Adobe (ADBE), Micron Technology (MU), among others. For those wondering, this represents confirmation that 2014 is a stock-picker's year.
Where am I going with this?
Currently, consensus full-year S&P 500 earnings expectations stand at $119.09 per share, up 6.2% from 2013. Yet the modest year-over-year drop expected for the first quarter equates to a 7% sequential decline. All this raises the question of how achievable that full-year growth forecast is for the balance of 2014.
The tea leaves in the coming weeks will be in corporate guidance. That kicks off this Tuesday with Alcoa's (AA) numbers, and will continue later in the week with JPMorgan Chase (JPM) and Wells Fargo (WFC).
I'm not diminishing the March-quarter results themselves. After all, if the numbers are worse than expected, that would worsen earnings-growth prospects even further for the balance of 2014. That said, if the above-cited guidance ratio does not see a meaningful shift toward positive numbers, Wall Street and the investment community would be compelled to rethink their earnings forecasts for 2014. Keep in mind: The S&P 500 closed this past Friday at 15.7x expected 2014 earnings, as compared with the five-year and 10-year respective averages of 13.2x and 13.8x.
As I've mentioned of late, some sectors are seeing a pick-up in demand, and those companies are poised to deliver positive guidance. Yes indeed, 2014 is shaping up to be a stock-picker's market.
Here's a more detailed view on what you can expect in the week ahead:
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Economic Calendar
Monday, April 7
- Consumer Credit (February)
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Tuesday, April 8
- Job Openings and Labor Turnover Survey (JOLTS) (February)
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Wednesday, April 9
- Mortgage Bankers Association (MBA) Mortgage Index (Weekly)
- Wholesale Inventories (February)
- Crude Oil Inventories (Weekly)
- Federal Open Market Committee (FOMC) Minutes (March 19 Meeting)
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Thursday, April 10
- Initial and Continuing Jobless Claims (Weekly)
- Import and Export Prices (March)
- Natural Gas Inventories (Weekly)
- Treasury Budget (March)
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Friday, April 11
- Producer Price Index (March)
- Michigan Sentiment Index (April)
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Earnings Calendar
Monday, April 7
- Zep Inc. (ZEP)
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Tuesday, April 8
- Alcoa Inc. (AA)
- InterCloud Systems (ICLD)
- WD-40 Company (WDFC)
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Wednesday, April 9
- Bed Bath & Beyond (BBBY)
- Joe's Jeans (JOEZ)
- Ruby Tuesday Inc. (RT)
- Sigma Designs (SIGM)
- Constellation Brands (STZ)
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Thursday, April 10
- Family Dollar Store (FDO)
- Pier 1 Imports (PIR)
- PriceSmart (PSMT)
- Rite Aid Corp. (RAD)
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Friday, April 11
- Fastenal (FAST)
- JPMorgan Chase (JPM)
- Wells Fargo & Co. (WFC)
