Dollars and Sense: Bring on the earnings reports

Earnings season. We’re fully into earnings season on Wall Street. What we have learned so far is that, in general, traders like what they see. The markets were mixed on Friday, with the S&P 500 up but the Dow down, slightly. But every other day last week, the markets rose. The fear that stocks were overvalued relative to earnings drove stock prices down in the first quarter. That fear became acute when analysts started revising earnings estimates downward. But now that we’re actually seeing earnings reports, they indicate prices are in line with historical price-to-earnings ratios. Goldman Sachs, General Electric, Morgan Stanley, Pepsi, Coke, and Johnson and Johnson all topped analysts’ earnings estimates last week.

Not recovering, but recovered? So are all these positive earnings reports a sign that the economy is not recovering, but officially recovered? You could make that case. I was in New York City last week, and the mood was very upbeat. The stores were packed. The hotels were booked solid. I walked down Wall Street and tourists formed a line to have their picture taken sitting on its iconic bronze bull statue. Of course, these very superficial indicators do not mean the economy is healthy, but there’s no doubt that things are trending in the right direction. We have gotten some good employment news in the past few weeks. New claims for unemployment benefits continue to trend downward. We’re now seeing weekly numbers consistently below 325,000. That’s a sign the economy is creating jobs. That said, the unemployment rate remains stubbornly high, above the Fed’s target of 6.5 percent. Even that number is historically high for a U.S. economy that is booming. So, I think we have to say that this economy, while showing some signs of strength, is far from robust.

Global issues. And problems in Ukraine are still affecting the markets. Take last Tuesday, for example. Stocks were up early in the day, but tumbled later on news that Ukrainian troops had seized an airfield from pro-Russian forces. That news got sorted out and the markets ended the day up, but it goes to show how vulnerable the markets are—rightly or wrongly—to this kind of news.

A market miscellany. Other news affecting the markets and the economy was generally positive. Lower gasoline prices meant the consumer price index rose just 0.2 percent in March, which suggests inflation is under control. Yahoo, which has been beaten down by the tech slump of the past few weeks, surged more than 6 percent on news of big revenue gains from the Chinese e-commerce company Alibaba, in which it owns a 24 percent stake. That was not just good news for Yahoo, but a sign that China’s economy continues to grow. Here in the United States, retail sales jumped a larger than expected 1.1 percent jump after a weather-challenged February.

The week ahead. Earnings season continues. It’s a light week for government economic reports, and even the reports it will release—new home sales, for example—are not likely to move the markets much. The durable goods report on Thursday is the only one the markets as a whole are likely to pay much attention to, and it probably won't trump earnings releases. So unless we get some sort of international crisis, earnings reports will continue to drive the markets for the week ahead.