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Weak Corporate Earnings Outlook Pinching Stocks Indexes

By Debbie Carlson Kitco News
Wednesday April 9, 2014 11:49 AM

(Kitco News) - The major stock market indexes are flat to slightly down for 2014 as the first-quarter corporate earnings season starts this week, and the outlook for earnings themselves is soft.

Analysts said a lot of blame for weak returns will be put on the unusually cold January and February weather in much of the country. According to FactSet, the latest consensus is that earnings for companies in the Standard & Poor’s 500 index will see a fall of 1.2%, which is a switch from FactSet’s forecast at the end of 2013 for first-quarter earnings to rise 4%, said Patrick O’Hare, chief market analyst at Briefing.com.

The bad weather, a stronger dollar, the slowing pace of emerging markets will all be taken under consideration for weaker earnings growth, O’Hare said.

Frank Lesh, broker and futures analyst with FuturePath Trading, said part of the recent weakness in equities is likely related to earnings season. “We’re near all-time highs, so it’s hard to stay long” going into earnings, he said.

S&Ps are closer to their highs than their lows, so to see some sort of correction isn’t unusual, he said.

It’s hard to say how the market will react to news about the cold weather impacting corporate earnings, Lesh said, as some of that might be priced in already.

O’Hare said although the market may have retreated somewhat on concerns with earnings, he said he thinks it might be part of a pattern that’s occurred lately of the market retreating as it expects poorer earnings, companies suggesting earnings may not be so strong, then when earnings do come up, they’re treated as better than expected, giving the indexes a boost.

“We’ve seen this happen over and over,” O’Hare said.

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Sector Rotation Hitting Technology

Of the major indexes, the technology-heavy Nasdaq market is getting hit the hardest, analysts said, with momentum stocks, biotechnology, fuel cell and social media stocks showing the greatest losses.

John Person, president of NationalFutures.com, said the current weakness in equities as a whole is likely the result of sector rotation.

Regarding earnings, Person said results will likely be hit or miss. “This economy is still not firing on all cylinders. The true leaders of each sector or industry (will do well). For example, in the department store sector, your Nordstorm’s, your Macy’s will probably outperform,” he said.

As is the case with corporate earnings, the outlook for the second quarter will be even more important than actual earnings. That’s particularly true as many market watchers and participants seem to have a sunnier outlook for the rest of the year. O’Hare said FactSet’s forecast for third- and fourth-quarter corporate earnings growth is close to 11%.

As he looks to the second quarter for the stock market, the market has to take into consideration the Federal Reserve continuing to end the quantitative easing program and how economic data is shaping up. If economic data does not perform well, bulls can’t blame it on the weather anymore, he said.

“The market could reach an inflection point,” he said, if earnings come out lower, economic data is soft and the Fed still reins in stimulus. “It could force a stronger revaluation that could lead to follow-through selling.”

But at the same time, O’Hare said, he doesn’t see stocks in a bubble, noting that S&P valuations are close to historic trends.

Unwinding of the Fed’s stimulus will be a focus for the second quarter, but Lesh said he doesn’t think the market has been too concerned about the Fed removing its quantitative easing program, “although not everyone agrees with me.”

“I really haven’t heard anyone talking about it. It’s a good thing to get the Fed out of the picture. It will be good to let things get back to normal,” he said.

Person said there are two ways to look at the Fed’s removal of quantitative easing.

“If they continue with quantitative easing, that means the economy really is not improving, but if they continue with quantitative easing, it shows the economy can continue without artificial stimulus,” he said.

As the Fed removes stimulus, that could mean large-capitalization stocks that pay dividends come back into favor versus small caps, O’Hare said, as bigger companies are less likely to need the excess liquidity the Fed provided versus smaller companies.

Technical Chart Support

Person said he still favors equities and he won’t turn “aggressively bearish” unless he sees a close under 1820 for the Standard & Poor’s 500 on a weekly chart and sees an increase in downside trading volume, with a bearish turn in market breadth.

“First, in essence, tops take longer to form than bottoms. Number two, just because they’ve taken off a third of the quantitative easing, we may see a pause if we don’t see the unemployment numbers come down,” he said.

Lesh said while S&Ps are “trading with a downside bias,” based on daily charts, the June S&Ps have strong support at the 100-day moving average which holds in between 1790 and 1800, with higher support seen at 1825.50, the March low. A close under 1790 could open the door for a slip to the 1750s.

By Debbie Carlson dcarlson@kitco.com
Follow me on Twitter @dcarlsonkitco



Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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