Dollars and Sense: Earnings season might actually matter this quarter
Earnings season matters. We’re in earnings season again, and this quarter people are actually paying attention. It almost sounds funny to say it that way, since it should matter every quarter. But for the past few years, earnings have taken a back seat to other measures. This five-year bull market has been fueled by quantitative easing, low interest rates, and factors other than corporate earnings. It’s sort of refreshing to see analysts get back to noting how well a company does to determine its value, even though it could result in analysts not liking what they see.
Low expectations. For the first time in a while, earnings are likely to be down from the year before. It’s too early to say what the trends are, but Bloomberg is projecting profits for S&P 500 companies will report in 5.8 percent lower than last year. Another survey predicted a less discouraging 3 percent decline. Bloomberg also says earnings will continue to slump for at least the next two quarters. And so far, earnings have borne out those projections. Alcoa, considered a bellwether, kicked off earnings season last week with decent profits but disappointing revenue. Bottom line: “If the U.S. market is going to advance this year, it’s going to need to advance mostly on the back of earnings,” said Russ Koesterich, chief investment strategist at BlackRock. “That has been a struggle so far.”
Other economic news. Turning away from the stock markets, we got a few reports that shed light on the overall economy. Last Monday, for example, we got a report from The Institute for Supply Management saying its services index slipped to 56.5 in March, down a bit from the February reading. Any reading above 50 still reflects growth, but the lower number means growth could be slowing.
M&A action continues. The merger and acquisition deals keep on coming. Royal Dutch Shell agreed to buy BG Group for about $70 billion. Ventas announced plans to buy Ardent Medical Services, a privately owned hospital chain, for $1.75 billion and spin off most of its skilled nursing facilities. As I said last week, we’ve seen a lot of mergers in the healthcare industry, many of them strategic moves motivated by Obamacare. I should add that even though Sen. Ted Cruz, R-Texas, and others among the presidential candidates are running on the promise of repealing Obamacare, it appears Wall Street may already be casting its vote with these mergers. They’re saying, “Like it or not, Obamacare, or at least radical changes in the healthcare marketplace, are here to stay—at least for the foreseeable future—and we’d better adjust accordingly.”
The week ahead. Earnings season will get into full swing, and as I said, analysts have low expectations. But it’s not clear to me what bad news will do to the markets. It could send them down, or it might be a sign that low interest rates will continue. That said, most analysts don’t see a lot of upside in this quarter’s earnings reports. The International Monetary Fund (IMF) will release its global economic forecast Tuesday. Christine LaGarde, the IMF managing director, gave us a bit of a preview late last week. She said she expects stronger growth in the United States and the United Kingdom, a continued European recovery, but a downgrade for growth in Russia and Brazil. China also is expected to slow further. None of that is very surprising, so I wouldn’t expect that report to roil the markets, though it likely will not slow the flow of cash from the U.S. to Europe. That cash flow is propping up European markets while putting a cap on the American exchanges. Case in point: The Stoxx Europe 600 index of eurozone shares hit a record on Thursday, rising 0.9 percent to edge above its previous high from early 2000.
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