Tuesday, May 5, 2015
Pre-open sentiment indicates a tentative start for the major indexes, with uncertainty about the economy and the Fed keeping the market from breaking out in a meaningful way. Friday’s jobs reading will be key to helping visibility, but today’s ISM survey should help matters as well.
On the data front, the service-sector ISM survey coming out a little later will give us some more color on the state of the U.S. economy’s growth momentum in the current period. The expectation is for a modest pullback in the index from the March’s 56.5 level, with a weaker-than-expected reading starting to bear on the current consensus narrative of weather being the primary reason for the Q1 slowdown.
Friday’s jobs reading is the most important economic report to settle this issue, but last week’s factory sector ISM survey failed to give us the needed assurance on the economy’s growth trajectory in the current period. All of this is critical to shaping Fed expectations, with the central bank expected to hold off longer if the Q1 slowdown isn’t weather-related after all.
On the earnings front, we got strong reports this morning from Walt Disney (DIS), Kellogg (K), Tenet Healthcare (THC) and others. Including this morning’s reports, we now have Q1 results from 393 S&P 500 members that combined account for 85.7% of the index’s total market capitalization. Total earnings for these index members are up +3.8% on -3.9% lower revenues, with 66.7% beating EPS estimates and only 43% coming ahead of top-line expectations.
As we have been saying repeatedly in this space since the start of this reporting cycle, this is weak performance relative to what we have seen from the same group of companies in the recent past. The revenue weakness particularly stands out, with not only growth non-existent, but an unusually higher proportion of companies missing top-line estimates as well.
While the Energy sector has been a drag on growth and the Finance sector has propped up the aggregate growth picture, the comparison to other recent periods would still be unfavorable even if we adjusted Q1 results for these two sectors.
Sheraz Mian
Director of Research
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