Wednesday, April 30, 2014
The shockingly weak GDP report threatens to steal the glow from the ADP (ADP) jobs report and a super-busy docket of Q1 earnings reports. But it will be a mistake to read too much into the weather-impacted GDP reading, which is nevertheless subject to two more revisions.
The ADP jobs tally came in better than expected, with April jobs ahead of estimates and the prior month’s tally revised higher, reconfirming expectations that the U.S. economy is steadily shaking off the effects of this year’s winter. This morning’s other key economic reading — the first look on Q1 GDP — showed how much of a restraint this year’s winter put on the economy, with the economy essentially grinding to a halt in the first quarter of the year.
The ‘headline’ GDP growth in Q1 turned out to be shockingly lower than estimates, with business spending (down -2.1% vs. up +5.7% in 2013 Q4), exports (-7.6% vs. +9.5%) and contraction in inventories dragging down growth in the quarter. As weak as the GDP report was, it probably makes sense not to draw any firm conclusions from its ‘noisy’ moving parts. The strong ADP report, on the other hand, is pointing towards the possibility of a positive surprise from Friday’s government jobs report.
The economy and jobs are in the spotlight today, but we also have a super-busy docket of Q1 earnings reports, with more than 250 companies (including 28 S&P 500 members) reporting results today. Including this morning’s reports from International Paper (IP), Time Warner (TWX), Hess (HES) and others, we now have Q1 results from 309 S&P 500 members that, combined, account for almost 68.5% of the index’s total market capitalization. Total earnings for these 309 companies are up +2.1% from the same period last year on +3% higher revenues, with 68.6% beating EPS estimates and 47.8% coming out with positive revenue surprises.
As with today’s GDP report, not much growth was expected from the Q1 earnings season as estimates had come down sharply before the reporting cycle got underway. But we saw the resumption of some momentum in the economy in the industrial production, retail sales, consumer confidence and other March data that came out this month.
Last month’s labor market readings showed a similar trend and today’s ADP report and Friday’s government jobs reading will likely confirm that the trend gained pace in April. Given this, it is reasonable to buy into the consensus view that Q1 GDP growth will be the low point for the year and the momentum will notably improve from Q2 onwards.
But we aren’t seeing anything comparable on the earnings front. The trend on the earnings front continues to be to the downside, with negative guidance from management teams prompting estimates for Q2 to steadily to come down. Total earnings for the S&P 500 are expected to be up +4.2% in Q2, down from the +5.5% growth rate that was expected about a month ago.
This is a modestly slower pace of negative revision relative to what we encountered in the comparable period in Q1, but the difference is likely a function of the marginally negative role that weather played in bringing down Q1 estimates. Adjusting for the weather effects in Q1, the revisions trend is still to the downside, hardly a reassuring backdrop for the stock market.
Sheraz Mian
Director of Research
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