MONDAY SCOUTING REPORT
Corporate America takes centre stage as the biggest companies begin to release their Q1 financial results.
We’ll learn how consumers and businesses really held up amid all of the fiscal policy uncertainty out of Washington, economic uncertainty out of Europe, monetary policy uncertainty out of Japan, and nuclear uncertainty out of North Korea.
The language that management employs during this earnings season threatens to derail the rally in stocks, which are currently near all-time highs.
- Earnings season unofficially kicks off Monday afternoon when aluminium giant Alcoa announces its first quarter financial results. Analyst expect around 0.6 per cent year-over-year growth in earnings. “Four of the 10 sectors are predicted to report lower earnings relative to a year ago, led by the Energy and Information Technology sectors,” says Factset’s John Butters. “On the other hand, the Utilities, Financials, and Consumer Discretionary sectors are expecting the highest earnings growth rates for the quarter.”
- Guidance will be crucial during this earnings season. For the globally exposed companies, we’ll want to hear just how bad things really are in Europe. We’ll also want to see if there’s any evidence of a slowing in China. In the U.S., we’ll want to know if uncertainty regarding fiscal policy has been a damper on business and consumer spending and investment activity.
- FOMC Minutes (Wednesday): The Federal Reserve will publish the minutes of its April 19-20 Federal Open Market Committee meeting. This should provide a little more colour regarding the Fed’s current dovish stance on monetary policy. The market’s primary concern seems to be that the Fed will start to tighten too soon, especially considering how the recent drop in the unemployment rate reflects people leaving the workforce. “Of more pressing concern for the Fed is the inconvenient fact that the unemployment rate keeps dropping,” said Morgan Stanley’s Vincent Reinhart. “When the Fed first set the Evans threshold on the unemployment rate at 6-1/2 per cent, it must not have envisioned the ongoing exit of workers from the labour market… it will be difficult to wean market participants away from the notion that 6-1/2 is a hard trigger for raising the policy rate.”
- Retail Sales (Friday): Recent data shows that the consumer continues to spend despite weak income growth. This has largely been a function of the falling savings rate. “We expect sales to have increased more moderately in March,” says Wells Fargo’s John Silvia. “While consumers have not gone into hiding since higher payroll taxes took effect, they do appear somewhat cautious in their discretionary spending. Sales at eating and drinking establishments have fallen in each of the past two months, while consumer confidence tumbled in March.”
The U.S. stock market continues to be within points of their all-time highs. But could this earnings season reverse the rally?
“Our view is that a sharp market correction only happens if people fear a BIG decline in earnings, not a small one that they view makes future results more achievable,” wrote Morgan Stanley’s Adam Parker. “We think April earnings and July guidance will continue to be muted, but we don’t think real fear about earnings will grow to the point we get a material stock market correction.”
Perhaps the bigger concern may be if the Fed signals that it’ll pull the plug on easy money policy sooner than expected.
Business Insider asked NYSE floor trader Greg Keating what he expects from the Fed. Watch what he said here://
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