Market Commentary - 5.13.2014

Weathering First Quarter Earnings Reports

With turbulent spring storms serving as a backdrop, U.S. equity markets have been weathering a flurry of 2014 headwinds, including the housing slowdown, avoidance of a near 10% correction in small-cap stocks and the growth and momentum retracement of last year's best winners. Add in Ukraine's territorial debacle with Russia and additional overseas challenges in China and the broader emerging markets, investors sure have had a lot on their plates to be concerned about. But let's take a moment to step back and re-examine a key element that undergirds market performance – corporate earnings growth or the lack thereof.

Earnings Do Matter

It often seems like quarterly earnings seasons are never-ending perpetual events, with only about one month transpiring before the next one starts. Yet corporate top and bottom lines (sales and profits) reports relative to analysts' forecasts are important measures of the health of a company. They also serve as determinants to help interpret future outlook. Indeed, equity valuations are primarily a reflection of a company's perceived ability to deliver future earnings growth, and secondarily for dividend-paying stocks, the company's ability to sustain and grow its cash distributions. This is the reason why some company's shares, that miss their Wall Street earnings expectations, often appreciate when their earnings reports contain improved “forward guidance” views.

So How Has the Quarter Been Shaping Up?

From the get-go, investors and analysts alike have been wrestling with how to interpret lackluster results reported during the start of the first quarter earnings season. Perhaps swayed by reduced retail sales data during the harsh winter weather, analysts' consensus forecast in March had called for earnings on S&P 500 companies to grow by just 0.9% year-over-year. As this estimate was down from a January 1, 2014 outlook for a 5% increase, it appeared the bar was set quite low. However, based on the changing fortunes of the reporting season, analysts' consensus view during April spanned from a dire April 15th tax day outlook for a 1.2% YoY decline in first quarter profits to an April 30th view for a 3.4% expansion in profits from the same period last year.

With the earnings season over 90% complete, of the 453 of the S&P 500 companies who have thus far reported results, approximately 76% have exceeded analysts' consensus forecasts, while around 53% have topped their revenue projections. Overall to date, first quarter earnings on reporting S&P 500 companies have grown by 5.1%, while sales are up 2.9%. Quite favorably, this means actual results have largely beaten the worrisome winter-weather induced early estimate adjustments and retuned back slightly above the view at the beginning of the year.

Forward-Looking Investment Implications

With 2014's severe winter-weather slowdown proving to be transitory and not undermining first quarter earnings, we continue to recommend maintaining exposures to equities relative to each individual's risk tolerances, and we have a slight bias to developed markets over emerging markets. We further reiterate our overarching imperative to maintain fully diversified portfolios, including the use of alternative-based investment strategies to help limit volatility.

This information compiled by Cetera Financial Group is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The information has been selected to objectively convey the key drivers and catalysts standing behind current market direction and sentiment. The opinions expressed are as of the date published and may change as subsequent conditions vary. Any forward-looking statements are based on assumptions, may not materialize, and are subject to revision.

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