Earnings season is basically complete with 95% of companies in the S&P 500 reporting earnings for Q1 2016. 71% have reported earnings above the mean estimate and 53% have reported revenues above the mean estimate. For Q1, the blended earnings decline is -6.8% year over year, (with -8.9% expected) and this marks the fourth consecutive quarter of earnings decline (Source: Factset). The last time we recorded four consecutive quarters of earnings declines ended with Q3 2009. Since stock prices basically follow earnings it is easy to see why the market has been struggling for the last year. The biggest headwinds to earnings have been oil prices, the strength of the US dollar, and uncertain Fed policy.
This week the market turned its attention to the Fed and its next meeting taking place June 14-15. The Fed has waffled back and forth over the last couple of years with sometimes dovish, and sometimes hawkish language about future interest rate increases. Minutes from the last meeting were released last week with hawkish language and indicate that a June rate hike is a possibility. The odds of a rate increase jumped from basically zero to a 26% chance of a rate hike. This spooked the market which managed to finished the week with a fractional gain.
Here is a look at oil which has stabilized and recovered from the low set in February. Oil is now up to $46.67 a barrel well off the low of $26.05. Higher oil prices bode well for earnings in the energy sector for the second half of the year. Higher interest rates and higher oil prices helps banks that have loaned money to the oil sector. Defaults in the oil space have been on the rise.
Here is a look at the US dollar. It has fallen since February which makes US exports cheaper and this also bodes well for earnings in the second half of the year. Talk of an interest rate increase in June caused the dollar to spike this past week however.
Finally, here we see a chart of leading economic indicators (blue line). Leading indicators on the rise indicate the economy is expanding in the future, declining leading indicators might point to a future recession. As you can see from the blue line, leading indicators continue to trend up and I believe the risk of a recession is still low. Recessions tend to be associated with big market declines.
Here is how markets fared as of Friday 5/20/2016. The S&P 500 measuring stock prices of the largest 500 US companies is once again negative over the last year and clings to a slight gain YTD.
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