Friday, August 15, 2014
The stock market today is expected to continue the positive momentum from the last few sessions. Stocks reversed the slide this week, recouping a fair amount of the losses from the preceding three weeks and getting back to within striking distance of July’s all-time high. It seems like the pullback has ended even before many people could acknowledge it. We saw something similar at the start of the year as well, though the pullback this time was even shallower.
No reason to think that the positive follow-through can’t continue, given the favorable momentum in the U.S. economy and the improving corporate earnings picture that emerged from the Q2 reporting season. Hopes remain high that the Q2 rebound in corporate and economic fundamentals isn’t a one-off event and will sustain itself in the current quarter – and gather further pace going forward. This raises the prospect of an earlier-than-currently-expected start to monetary policy tightening. But pricing pressures remain tame, as this morning’s wholesale inflation reading reconfirms, and slack in the labor market has been keeping wage gains in check.
The earnings picture is notably reassuring, with Q2 earnings season bringing in a ramped up growth pace. The pace of negative estimate revisions for the current and coming quarters, which has been a recurring theme quarter after quarter for almost two years, has been unusually low this time around. Negative revisions will likely increase a bit in the next few days following soft results from retailers like Wal-Mart (WMT), Macy’s (M) and others.
But given the low revisions to Q3 estimates thus far, we are unlikely to reach levels seen in other recent quarters. Hard to tell whether this is a one-off or something sustainable – we will find out in a couple of months as the Q3 reporting season gets going. That said, it is nevertheless an improvement over what we have been seeing in the recent past.
Sheraz Mian
Director of Research
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