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Earnings Season Underway – Unexpected Winners and Losers

Market Digest – Week Ending 4/17

Stocks bounced back in a holiday shortened week, driven by dovish commentary from Fed Chairwoman Yellen, strong retail sales numbers, and a solid start to earnings season. The S&P 500 gained 2.7% and snapped a three week trend of trailing international stocks. Bonds fell modestly.

Weekly Returns:

S&P 500: 1,865 (+2.7%)
FTSE All-World ex-US: (+1.5%)
US 10 Year Treasury Yield: 2.72% (+0.10%)
Gold: $1,295 (-1.7%)
USD/EUR: $1.381 (-0.6%)

Major Events:   

  • Monday – European Central Bank President Mario Draghi said more strength in the euro could prompt further monetary easing.
  • Monday – US retail sales increased 1.1% in March, the most since September 2012.
  • Wednesday – The New York attorney general’s office has subpoenaed about a half-dozen high-frequency trading firms over their relationships with exchanges and dark pools.
  • Wednesday – Fed Chairwoman Yellen boosted markets with comments saying her focus is on low inflation and economic slack.
  • Thursday – Earnings results from the six largest U.S. commercial banks by assets showed an 8.3% increase in commercial loans outstanding in the first quarter from a year ago.
  • Thursday – Russian President Putin said he hoped not to send Russian troops into Ukraine but didn’t rule it out. Russia and Ukraine agreed to steps to try to reduce tensions, including demobilizing militias.
  • Thursday – Chinese internet stocks Weibo (WB +19%) and Leju (LEJU +18.6%) surprisingly showed strong IPO debuts in what has been a very rough year for internet/social media stocks and tech IPOs.

Our take:

Earnings season is off to a mixed start. Expectations are very low, with total earnings for the S&P 500 expected to be down 4% from last year. Falling earnings and rising stock prices rarely go together so this is a concern. But there are reasons to be optimistic. First, with expectations this low, they won’t be difficult to beat.

There are also positive signs from banks. Earnings tend to be fickle and hard to read, but it is clear is that banks are increasing commercial lending. This is encouraging since it has a stimulating effect on the overall economy.

It is easy to get caught up in the happenings of glamorous Technology and Consumer stocks, but earnings will need to grow broadly across sectors for the bull market to continue to run. The only sector expected to post double digit earnings growth is the often overlooked Utilities. It’s a good reminder why it makes sense to be well-diversified at the sector level.

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