Thursday, February 26, 2015
Stocks are expected to start today’s session modestly in the green at the open, with positive momentum from the last few days continuing into today’s session despite this morning’s mixed economic data.
Of the three economic reports this morning – Jobless Claims, Durable Goods, & CPI – the inflation reading has assumed the most significance lately, particularly following Fed Chair Janet Yellen’s Congressional testimony this week. The FOMC position is that the Fed should be in no hurry to start raising rates as long as inflationary pressures remain tame and their preferred reading of inflation stays below their 2% target.
Today’s benign CPI reading didn’t produce any change to that view. What this means is that unless inflationary data starts heating up in the next couple of months, then the start of the rate hike process is later than June. Of the other two reports, the Jobless Claims read was weak, but that was likely due the President’s Day holiday, while the Durable Goods report was on the positive side.
The Fed aside, with the Q4 earnings season winding down, estimates for the current period have stabilized. As we have been describing in this space as part of our Q4 earnings analysis, estimates for the current and following quarters have been falling sharply in the last few weeks. The fact is that practically all the earnings growth that was expected in the first half of 2015 just a few months back has now been replaced declines. Total earnings for the S&P 500 companies were expected to be up +10.8% in early October, which fell to a growth rate of +4.9% in mid-December and are now expected to be down -5.5%.
A lot of this is obviously due to what is happening with oil prices, but the picture isn’t that much better outside of oil either. Take the example of Retail sector companies that have been reporting lately and are generally seen to be benefiting from low energy prices. Results from Kohl’s (KSS) and Sears Holdings (SHLD) this morning and Wal-Mart (WMT) and Target (TGT) in recent days can be interpreted to be beneficiaries of low energy prices. But that hasn’t stopped Q1 estimates for some of these companies to come down following their Q4 earnings releases.
For example, Wal-Mart’s Q1 estimate has fallen more than -8% since the company’s earnings announcement last week while Target’s estimates have been coming down as well, though not to the same extent. Overall, Q1 earnings growth for the Retail sector is down from +6.3% in mid-December to today’s +1.2% gain.
Sheraz Mian
Director of Research
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