Great Earnings Season So Far

We are in the middle of Q1 earnings season, and so far it is a great one.  Expected growth in first-quarter earnings for companies in the S&P 500 index has now jumped to 50% from 39% in the prior week according to Reuters.  Many companies in various sections of the economy such as Citigroup, Goldman Sachs, Apple, Intel, Netflix, Caterpillar each reported earnings growth far above analysts’ estimates. 

In this coming week the Q1 earnings season culminates with six of the 30 Dow Jones Industrial Average components and a third of the S&P 500 companies scheduled to post their operating results.  In the S&P 500 through Friday, 83% of all companies have already posted results above analysts’ expectations. In an average quarter only 61% of companies beat the street estimates.  Also, companies are not sacrificing revenue growth in order to improve their bottom lines. Revenue too has also bested most analyst estimates.  69% of those companies that have reported thus far have topped their revenue views.  Q1 will now mark two quarters in a row where the S&P 500 has recorded earnings growth.

More Milestones (Re)taken

In October, the Dow crossed 10,000 on its way up from the bear market lows.  It was hardly a case for celebration.  Now, about six months later, the Dow is 1,000 points higher.  Other major indices also crossed milestones of their own: S&P 500 is now above 1,200 and Nasdaq is over 2,500.

Again, while noteworthy, these “accomplishments” are really not that important.  Dow Jones first crossed 11,000 in 1999.  S&P 500 was at 1,200 level in 1998.  Nasdaq traded at 2,500 in 1999.  So while we made excellent progress from the market lows of March 2009, we are still at the levels of 11-12 years ago.

The economic news continues to get better.    Here are some of the highlights:

– Factory orders rose 0.6% in February.
– Manufacturing index is at 58.8, indicating expansion.
– Fewer Americans are filing  jobless claims.
– Auto and retail sales are rising. 
– Inflation remains low at around 1% annual rate.
– TARP funds are being repaid at a much higher than expected rate.  It is now estimated that TARP program cost will be $89 billion, down from $250 estimate one year ago.
– There is evidence of economic recovery abroad.  For example, Chinese GDP rose by 11.9% in the first quarter.

Most importantly for the equities, the first quarter earnings season is off to a good start with excellent reports by Intel and JP Morgan.  While one can argue that at least some of these news are already incorporated into stock prices, and a correction similar to the one in January can happen, the longer-term environment remains benign.

Market Update

With the exception of news coming from the Euro zone regarding Greek and now possibly Portuguese debt problems, the economic environment this quarter continued to be quite benign.  We had generally positive reports on retail sales, housing market, and consumer spending, while the unemployment remains high.  Some analysts talk about “tortoise market”, referring to the fact that the since the end of January correction, markets moved very slowly but very steadily upwards.  The infamous VIX index, also known as the fear gauge, which measures market volatility, has been consistently trending down and now is at the level of mid-2007.  It appears that there is some complacency in the market, which in itself should warrant caution.  On the other hand, many still view this rally and recovery with considerable skepticism, and fund managers have cash available to invest, which is a positive sign.  While my outlook for the rest of this year remains positive, I would not be surprised to see another correction similar to the one experienced in January.