February 2014 Market Commentary
The fourth quarter earnings reporting season started off badly but has improved significantly in recent weeks. The aggregate earnings for stocks in the S&P 500 are on track to reach a new all-time quarterly record, and earnings growth for the quarter should wind up being the highest of any quarter during the year.
According to Zacks, with 219 S&P 500 members accounting for 58% of the index's total market capitalization having reported, total earnings are up 12% from the same period last year, with 71% beating earnings expectations. Total revenues for these companies are up 1.8%, with 51% beating revenue expectations. Analysts now expect earnings growth for the fourth quarter to reflect 7.9% growth, up from 6.3% just a few weeks ago.
Ironically, over the last few weeks while these reports have been rolling in stocks have been dropping. In contrast, last year stocks continued to rise while earnings estimates were being reduced in November and December.
While this may seem irrational, keep in mind that hopes were high of accelerating growth as we move through 2014 thanks to an improvement in economic data. But recently the economic data has begun to deteriorate, while the commentary from management teams on the conference calls has mostly had a negative tone.
Meanwhile, the trouble in emerging markets continues. Emerging market currencies and stock markets have been under pressure due to the U.S. Federal Reserve's gradual reduction of stimulus. The Fed's "tapering" also threatens to raise interest rates in the United States throughout 2014.
While it is too soon to tell if the recent softness in economic data will linger further into the year, we are cautious regarding stocks. Our indicators are suggesting that the market may rebound over the next few weeks, but remain volatile the rest of the year.
Hold on tight investors, the ride is likely to stay bumpy!
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Source: Bloomberg, Haver, Guggenheim Investments. Data as of 3Q2013 for market cap, 2Q2013 for GDP.
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