Markets, GDP and Corporate Earnings on May 1, 2016
Written by Rick Welch on May 1, 2016
Markets – Major equity indices were largely range bound in April following strong gains in March. Equity prices rose moderately for a few weeks only to sell off a bit on the last two trading sessions of the month. April was full of market moving news including the beginning of the Q1 earnings season, a meeting of the FOMC (April 26-27) and the Advance Estimate of Q1 GDP on April 28th. The financial markets were relatively calm balancing the prospect of stabilizing oil prices with the onset of what is expected to be a difficult round of corporate earnings. For the month, we saw gains across all major indices, including US Large Caps (DJIA rising +0.50% and S&P 500 rising +0.27%), US Small Caps (Russell 2000 rising +1.41%) and International (ACWX rising +2.53%). Volatility (as measured by VIX) was subdued with a month end reading of 15.7, well below the long run average of 20.0. The Barclays US Aggregate Bond Index rose +0.06% as the yield on the benchmark 10-year US Treasury bond rose from 1.79% to 1.82% during the month. In 2016, we see the following year-to-date benchmark performance data: DJIA (+2.00%), S&P 500 (+1.04%), Russell 2000 (-0.44%), International (+2.19%) and US Aggregate Bond (+2.66%).
GDP – The Advance Estimate of Q1 GDP growth released by the Bureau of Economic Analysis (www.bea.gov) showed that economic growth in the US slowed during the winter months to an annual rate of +0.5%, the slowest growth recorded since Q1 of 2014 (-2.1%). The deceleration in GDP in Q1 (compared to +1.4% in Q4) reflected decreases in private inventory investment, exports, nonresidential investment and federal government spending. Positive contributions were seen in personal consumption expenditures or PCE (which came in at +1.9%, above most estimates of +1.7%), residential fixed investment and state and local government spending. 2015 started in similar fashion with Q1 GDP growth of +0.6%, followed by a much stronger +3.9% in Q2. The slow Q1 of 2016 continued the pattern seen over the last 6 years in which Q1 GDP growth has averaged +0.6%, while all other quarters averaged +2.8%. Most estimates for Q2 GDP predict a rebound above +2.0% with stronger, though moderate growth following in Q3 and Q4.
Earnings – The Q1 earnings season is now underway with over 62% of the companies in the S&P 500 having reported their quarterly earnings. 124 companies are scheduled to report their Q1 earnings this week. Thus far, the results are slightly better than estimates made at the beginning of the reporting period as 74% have reported EPS above estimates and 55% have reported sales above estimates. Blended earnings growth for Q1 is coming in at –7.6%, better than the estimated earnings growth rate of -8.7% at the start of earnings season. Recent upside earnings surprises have been reported in the Consumer Discretionary, Energy and Materials sectors. An earnings decline in Q1 (should it hold as expected) would mark the first time the S&P 500 has seen four consecutive quarters of year-over-year earnings declines since Q4 2008 through Q3 2009. The percentage of companies reporting EPS above estimates (74%), is above the 5-year running average of 72%. The 12-month forward P/E ratio is 16.8, which is above the 5-year average. At the sector level, Consumer Discretionary is off to a solid start reporting the highest earnings growth rate of +17.7% with notable performance across several sector categories, represented by Amazon, Ford, Hasbro, Netflix, Royal Caribbean and Under Armour.
