Markets, GDP and Earnings on May 1, 2015
By Rick Welch on May 1, 2015
Markets – April ended on a sour note as the three major US indices all fell -1.0% on April 30th. Over 21 trading days in April we saw the S&P 500 rise on 12 days and decline on 9 days. Momentum and direction were hard to find as the market failed to extend both winning streaks (3 consecutive days) and losing streaks (2 consecutive days). For the month we saw gains in US Large Caps (+0.85%), International (+4.64%) and Emerging Markets (+6.85%). US Small Caps went against the trend falling -2.50%, as measured by the Russell 2000. Volatility (as measured by VIX) was range bound entering April at 15.26 and ending at 14.77, both levels well below the long run average of 20.0. The Barclays US Aggregate Bond Index fell -0.66% as the yield on the benchmark 10-year US Treasury bond rose from 1.93% to 2.04% during the month. For 2015, we see the following year-to-date performance data: DJIA (+0.09%), S&P 500 (+1.29%), Russell 2000 (+1.29%) and International (+8.85%).
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 +0.2%, the slowest growth recorded since Q1 of 2014 (-2.1%). Many economists believe that there were temporary factors (examples include harsh winter weather, west coast port strike and strong US dollar) behind this disappointing performance and that growth should return this spring and summer. The slow Q1 continued the pattern over the last 5 years in which first quarter GDP growth has averaged +0.6%, while all other quarters averaged +2.9%. An early read shows increases in personal consumption expenditures or PCE (+1.9%), durable goods (+1.1%), services (+2.8%), federal government spending (+0.3%) and investment in private inventories (+0.7%). Decreases were seen in nondurable goods (-0.3%), nonresidential investment (-3.4%), defense spending (-0.7%) and exports (-7.2%). During Q1 consumer spending grew at a slow +1.9%, as the American consumer decided that a larger paycheck (personal disposable income was +6.1%) presented an opportunity to save (personal savings were +5.5%) rather than spend.
Earnings - The Q1 earnings season is well underway with over 72% of the companies in the S&P 500 having reported their quarterly earnings. Thus far, the results have been not as bad as expected with 71% reporting (EPS) above estimates and 46% reporting sales above estimates. Blended earnings growth for Q1 is coming in at -0.4%, much higher than the estimated Q1 earnings growth rate of -4.6% at the start of earnings season. The percentage of companies reporting EPS above estimates (72%) is below the 5-year running average of 73%. At the sector level, Consumer Staples and Health Care have the highest percentages of companies reporting earnings above estimates. Estimates of Q1 revenue growth indicate a decline of -2.6%, the largest decline in revenue since Q3 2009 (-11.5%). Thus far, the Health Care (+21.7%) and Financials (+13.0%) sectors have the highest earnings growth rates. As expected, the Energy sector is reporting an earnings decline of -59.1%, a level that is toward the low end of the range (-30.0% to -64.0%) of previous estimates. This struggling sector predicts some improvement during Q2 with a forecast change in quarterly EPS of -4.8%.
