Back in early March a grim view of the economy started to emerge. That’s when the coveted GDP Now model estimated US growth in the first quarter was barely above 0%. That is precisely when this ferocious post-correction bounce came to a screeching halt.
Gladly it didn’t take long for investors to find that things were better than feared. That’s because the next slate of economic reports showed a healthier perspective on the rate of growth. That picked up major speed this past week with a much stronger than expected Retail Sales report helping lift GDP Now to +2.8%.
I’ll be honest. I don’t believe that final GDP is going to end up that strong. Please realize that the Blue Chip Consensus (a panel of economists) has a projected growth rate of +1.5%. Anywhere between that and GDP Now would be considered better than previously expected and a feather in the cap for the stock market.
How About Earnings?
This brings us around to another important investment factor that was previously looking sour. I am referring to Q1 earnings estimates that pointed to a negative growth rate, which is a far drop from the 20% pace of last year.
We talked about this backdrop in last’s weeks commentary: K.I.S.S. for Stock Investing
The key section of that article is shared here:
“Earnings for S&P 500 companies are expected to fall 4% year over year in Q1. That is a pretty grim outlook, and yet stocks have been rising boldly in the face of this news.
It’s not really as bad as it sounds. You have to remember that Q1-2018 is when the new corporate tax cuts kicked in and earnings exploded 24.9% higher. So really stocks are suffering from tough comparisons.”
Early Earnings Results are Promising
At this stage only 15% of the S&P 500 companies have reported. The rate of earnings beats is 79.2%, which is above average while the overall earnings growth stands at +0.2%. (Courtesy of my long time friend, Sheraz Mian at Zacks Investment Research)
Yes, that growth is not impressive on an absolute basis. However, it is markedly better than the -4% decline that was expected. This “better than feared” outcome explains why the market has reacted favorably to earnings thus far.
The next 2 weeks is really the heart of earnings season. If the current trends remain in place I expect stocks to finally take out the old highs of 2941 on the way to a test of 3000.
At that stage we should all be prepared for an extended consolidation period…and maybe a 3-5% pullback. That would seem to be a very rationale reaction given how far stocks have come from the Christmas Eve low of 2346. Meaning that after running a marathon you have to rest up before the next race.
So keep a bullish posture my friends. Just make sure to load up investments likely to outperform. These articles and resources from StockNews.com and ETFDailyNews.com will you on the right track:
…but my friends call me Reity (pronounced “Righty”)
CEO, Stock News Network