by Shawn Narancich, CFA
Vice President of Research
Under Promising and Over Delivering Investors were barraged with earnings reports from bellwether companies across the spectrum this week. While only about a quarter of S&P 500 companies have reported first quarter results so far, what is already clear is that analysts were too conservative in estimating the earnings power of corporate America. Companies beating earnings estimates outnumber those missing by better than a 4-to-1 ratio so far, with a fair number also reporting better than expected revenues. These trends are better than what we saw at the same time three months ago, and while companies aren’t highlighting it, those making money are benefitting from a leap-year quarter in which everybody gets one more day of sales.
The Shine Comes off Tech In discussing business trends, management teams are cautious in their outlooks and for the most part have avoided projecting first quarter beats into upwardly revised full-year forecasts. Banks like Citigroup, US Bancorp, and Bank of America are benefitting from moderate loan growth, reduced provisioning for bad debts, and improved capital markets activity; consumer companies Coca-Cola, Philip Morris International, and Kimberly-Clark from surprisingly decent volumes in the face of price hikes; and industrials such as Honeywell and GE from cyclical upturns in aerospace and energy. With the notable exceptions of Microsoft, eBay and Seagate—technology earnings are off to a murkier start with Intel forecasting less robust second-quarter margins, SanDisk citing poor semiconductor pricing and margins, and IBM and EMC both reporting lackluster hardware sales growth. The stocks reacted accordingly, with tech underperforming a market that rose for the first time in three weeks. Year-to-date, it remains the best performing sector of the market, but its lead has narrowed.
Summer Swoon? While earnings rage on, economic data has turned decidedly murky. Retail sales for March came in better than expected, but with building materials, auto sales and home and garden leading the way—one has to wonder if the warm spring pulled forward demand. Industrial production was flat for the second consecutive month and both the Philly Fed and Empire State Manufacturing indices waned, indicating a slowdown that could be reflecting the European recession and a weaker Chinese economy. Investors fear another year where strong first-quarter data give way to a softer summer. In contrast to this time last year, global central banks are in easing mode and petroleum prices are declining.
Easier Money in Emerging Markets Despite lingering inflation issues, India cut rates by 50 basis points, marking their first interest rate reduction this cycle, while emerging-market cousin Brazil continued on its path, cutting short-term rates by another 75 basis points. The rate move in Brazil is having the intended effect of reducing the real’s value, which is now down for the year against other major currencies. Domestically, weekly jobless claims have stopped improving, so with the stall in industrial production and weaker housing data of late, investors will tune into next week’s Federal Reserve meeting to see if “Bernanke & Co.” are any more amenable to another round of quantitative easing. In Europe, record high credit-default-swap spreads on Spanish 10-year debt accompanied by yields breaching the 6 percent level acknowledge the recession and funding issues that continue to plague this country. Amid stress and turmoil, the global safe-haven asset remained well bid, as benchmark 10-year Treasury yields closed the week to yield less than 2 percent.
Our Takeaway from the Week
- Earnings season is off to an encouraging start, but softer economic data has taken the punch out of stock investors
- Earnings roll on next week with energy, consumer and more tech companies in the spotlight.