/perspectives/weekly-viewpoint/q1-earnings-to-take-center-stage

Q1 Earnings to Take Center Stage

The major market indices finished the week mixed to modestly higher with the broader S&P 500 and Nasdaq Composite outperforming the blue-chip Dow Index.

April 15, 2019    |    By Mike Schwager

Performance for Week Ending 4/12/2019:

The Dow Jones Industrial Average (Dow) dipped 0.05%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 0.58%, the Standard & Poor’s 500 Index (S&P 500) rose by 0.51% and the Nasdaq Composite Index (NASDAQ) tacked on 0.57%. Sector breadth was positive with 9 of the 11 S&P sector groups finishing higher. The Financials sector (+2.09%) was the best performer followed by Communication Services (+1.55%) and Technology (+1.16%).

Index* Closing Price 4/12/2019 Percentage Change for Week Ending 4/12/2019 Year-to-Date Percentage Change Through 4/12/2019
Dow 26412.30 -0.05% +13.22%
Wilshire 5000 30060.62 +0.58% +16.74%
S&P 500 2907.41 +0.51% +15.98%
NASDAQ 7984.16 +0.57% +20.33%

*See below for Index Definitions

 
MARKET OBSERVATIONS: 4/8/2019 – 4/12/2019

The major market indices finished the week mixed to modestly higher with the broader S&P 500 and Nasdaq Composite outperforming the blue-chip Dow Index. The modest performance reflected caution ahead of the kick-off to first quarter earnings season.

According to Bloomberg, first quarter earnings for the S&P 500 are expected to decline by 3.9%, the first contraction in earnings since the second quarter of 2016. The good news is that the decline in earnings is expected to be limited to the first quarter, with consensus forecasts showing sequential growth over the remainder of the year. Needless to say, expectations heading into the first quarter are quite low, suggesting there may be room for upside surprise. While the quarterly results will be monitored closely, we must be cognizant that they are backward looking (reflecting the months of January through March). More importantly will be the forward guidance from company management and how they see the remainder of the year playing out.

Better than Feared, but Still Early: While first quarter earnings season is still in its infancy (only 29 of the 500 companies have reported as of Friday), the initial results are mildly encouraging. Of the companies that have released results, 82 percent have met or exceeded expectations with the aggregate upside surprise at nearly 3 percent. As expected, earnings growth has been weak (aggregate growth down 3.5%), but still mildly better than the feared 3.9 percent decline. Revenues, on the other hand, are showing aggregate growth of 3.7 percent. The rise in revenues and fall in earnings growth suggests margins are coming under pressure, likely a result of rising wages and higher energy costs, among other things.

Economic Data: Following the recent monthly jobs data that showed nonfarm payrolls in March expanded at a better than expected pace, the Labor Department reported last week that initial jobless claims during the week ended April 6 fell 8K to 196K, moderately below the 210K expected by economists and the lowest level in 49 years. The four-week moving average—which helps smooth the week to week volatility—fell to 207K, the lowest level since last December 1969. With about two-thirds of the US economy driven by consumer spending, a strong jobs market is key for continued economic growth. Elsewhere, both the Consumer and Producer Price Indexes showed that “core” inflation (ex-food and energy) remained constrained, underscoring the Fed’s decision to be patient on raising rates.

March Meeting Minutes: The market had little reaction to last week’s release of the March FOMC meeting minutes as they essentially indicated the Fed will remain in ‘wait and see’ mode. According to the minutes, "with regard to the outlook for monetary policy beyond this meeting, a majority of participants expected that the evolution of the economic outlook and risks to the outlook would likely warrant leaving the target range unchanged for the remainder of the year," adding "several participants noted that their views of the appropriate target range for the federal funds rate could shift in either direction based on incoming data and other developments."

Outlook: We maintain a bullish tilt towards the market and continue to believe there is money to be made over the coming quarters. While a period of consolidation following the strong year-to-date performance cannot be ruled out, a drawdown would be viewed as healthy as it would likely set the stage for the next leg higher. Our view is that as long as the economy and earnings continue to grow – which remains our base-case scenario—equity prices should ultimately follow suit.

The Week Ahead: First quarter earnings season will move to the front-burner during the holiday shortened week with 49 members of the S&P 500 scheduled to report. Included in this group are six members of the Dow Jones Industrial Average. Highlights of the data calendar include; the April Empire State manufacturing survey, March industrial production, the April housing market index, the April Philadelphia Fed business outlook survey, March retail sales and March housing starts. Also of interest will be Wednesday’s release of the Fed’s periodic Beige Book report. Fed Heads will be out and about with six events scheduled throughout the week.

Definitions

The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Wilshire 5000 Total Market IndexSM represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The index is comprised of virtually every stock that: the firm's headquarters are based in the U.S.; the stock is actively traded on a U.S. exchange; the stock has widely available pricing information (this disqualifies bulletin board, or over-the-counter stocks). The index is market cap weighted, meaning that the firms with the highest market value account for a larger portion of the index.

Standard and Poor's 500© Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

This material contains opinions of the author, but not necessarily those of Guggenheim Partners, LLC or its subsidiaries. The opinions contained herein are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information. No part of this material may be reproduced or referred to in any form, without express written permission of Guggenheim Partners, LLC.




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