Much like you, we were hoping for some resolve when it came to the EU-Greece drama that has been driving headlines over the last several weeks. Alas, it seems we are not likely to assess any such resolve until Monday at the earliest. Color us cautious, for as we've all heard countless times before, be it with a merger, new product launch or a bailout such as this, the devil is in the details.
On Friday morning during Versace's regular appearance on America's Morning News, host Matt Ray asked him what else investors should be paying attention to given that it seems most if not all eyes have been focused on the Greece situation. We thought that was a great question because one of the dangers investors face is becoming overly focused on one particular event so that they lose sight of nearly all else going on around them. That can make it difficult to keep tabs on key happenings and data points, which -- being the data junkies we are -- help put things into perspective.
An example of such context and perspective was called for with last week's "better than expected" May personal spending data. Here's the issue: Gas prices have climbed 27% since early February and 16% since early April. Add higher food costs -- have you seen the price of eggs lately? -- and rising health care costs, and it stands to reason that, yes, consumers are spending more. The following chart shows that while the automotive industry is still humming, general retail continues to be lackluster on a sequential basis and down year over year. Hardly something to get excited about, in our opinion.
If your eyes were glued to the cable news headlines on Greece, you probably missed that truck tonnage remained weak in May and weekly reports indicate rail traffic continued to move lower for the first three weeks of June. More data to support what Chris Williamson, chief economist at Markit, said following last week's June flash PMI figures for the US: "Manufacturers reported a disappointing end to the second quarter, with factory output growing at the slowest rate for a year and a half."
The deteriorating economic picture has not gone unnoticed by monetary policymakers. Rather, it was reflected in their downgraded projection for 2015 GDP growth, now centered on 1.9% compared to their 2.5% forecast in March. With the data continuing to be soft, odds are the current consensus expectation for the second quarter of 2015 will be a tad weaker than the current consensus estimate of 2.5%. That means the economy will need to grow roughly 2.7% in the third and fourth quarters of the year to achieve the Fed's latest GDP target. Even if we hit that speed, it still means GDP growth of 1.9% would fall short compared with either 2014 (2.4%) or 2013 (3.1%). More reasons to think the Fed will be pulling the rate hike trigger later than many currently think.
As we close out the week, the S&P 500 is trading near 17.6x expected 2015 earnings of $119.65 per share, well above the five-year average of 13.8x and the 10-year average of 14.1x. We'd note that earnings expectations for 2015 are up only 2.1% year over year. We'd also point out that given the expected year-over-year declines in the first half of the year, current expectations for the second half could prove a bit aggressive given the tone of the economy and the dollar.
Why do we point this out? As Hawkins likes to say, risk and risk management are key and that means looking at what may go wrong and assessing the probability it might do so. Not only will we soon be hip deep in second-quarter 2015 earnings and no doubt the focus will be on second-half 2015 expectations, but according to the WSJ stats group, the S&P 500 has gone 174 straight trading days without a 5% pullback from a recent high. Quite the record, and much like us, it probably has other investors wondering when it might happen next.
While the bottom-line performance of corporate earnings will continue to be buoyed by corporate America's rampant use of buybacks, operating expectations will once again be revisited in the next few weeks. Our thinking is it's better to be on guard and ready than caught in a lurch that could leave you seeing paper profits dwindle. We've all been there and it's simply not any fun. The advice we'd share is to use the relatively quiet time over the next two weeks to sharpen your pencils and double-check earnings expectations for companies in your portfolio.
As we close out June and move into July this week, we'll have a multitude of data points to help us hone in on the true velocity of the domestic economy in 2Q 2015. Because the domestic markets are closed on Friday in observance of the July 4 holiday, we'll be getting five days of start-of-the-month data compressed into two. That means the usual car, truck and employment data as well as ISM manufacturing data and several regional Fed manufacturing surveys. To us, this will be some of the last significant data points we'll get as we set sail for the summer doldrums. Even though we'll be busy parsing 2Q 2015 earnings, we'll be surrounded by empty seats and vacation days during July and August, particularly in the U.S. and eurozone. That means once we've digested the next slate of reports, it's September data that will matter most.
Of those earnings reports worth watching this week, we've got ConAgra (CAG) and General Mills (GIS), which should shed some light on how higher egg prices will impact food and restaurant companies; McCormick (MKC) will also be reporting as will Constellation Brands (STZ); and finally, being the exciting person that he is, Versace will be monitoring the Greenbrier Companies (GBX) results to assess the health of new railcar demand.
Below is a more detailed look at the economic data in the week ahead. For a fuller list of corporate earnings to be reported over the next five days, click here to view The Street's weekly earnings calendar. Enjoy the weekend and be sure to catch Lenore Hawkins Monday on America's Morning News, and 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, June 29-Friday, July 3|
|29-Jun||Pending Home Sales|
|29-Jun||Dallas Fed Manufacturing Survey|
|30-Jun||Case-Shiller 20-city Index|
|30-Jun||State Street Investor Confidence Index|
|1-Jul||Markit Japan Manufacturing PMI|
|1-Jul||HSBC China Manufacturing PMI|
|1-Jul||Markit Eurozone Manufacturing PMI|
|1-Jul||Markit US Manufacturing PMI|
|1-Jul||JPMorgan Global Manufacturing PMI|
|1-Jul||MBA Mortgage Index|
|1-Jul||Challenger Job Cuts|
|1-Jul||ADP Employment Change|
|2-Jul||Nonfarm Private Payrolls|
|2-Jul||Natural Gas Inventories|
|3-Jul||US Markets Closed; Banks Open|