Equities sold off on Friday of last week as some headline companies disappointed on 1st quarter earnings. Despite headline names like Amazon and Google missing analysts’ estimates, 1st quarter earnings are still above average.
So far, 55% of S&P 500 companies have reported 1st quarter earnings and 80% are above analysts’ expectations, which is above the 5-year average of 77%. In addition, 72% have reported revenue above estimates, which is above the 5-year average of 69%. Industrials, Consumer Staples, Health Care, and even Technology are beating analysts earnings expectations at a rate of better than 80%.
Economic data was mixed last week as manufacturing and housing data was both positive and negative.
The Richmond Fed Manufacturing Index was higher month-over-month, while the Kansas City Fed Manufacturing Index was lower. GDP for the 1st quarter came in negative in terms of quarterly growth, however, as we pointed out last week in our Friday commentary, the actual number (Q4 vs. Q1) was positive. Pending Home Sales were better than expected, but still down. New Home Sales were just below the market's expectations. Personal Spending, a measure of the health of the consumer was higher last month.
This week, the blackout period for corporate buybacks ends meaning markets could stabilize.
According to Goldman Sachs, equity investor sentiment has cratered, meaning a reversal in equities could be on the horizon. Over the last 14 times that Equity Sentiment has reached these levels or worse, the market was higher 100% of the time 6 months later. In 13 out of 14 occurrences, the market was higher 3 months later.
The Fed announces on Wednesday what is expected to be a 50 basis point rate hike. In fact, the market is pricing in almost a 100% probability of a 50, not 75 basis point hike. If they stay true to that expectation, markets should absorb the announcement in stride. However, if the language from the Fed is overly hawkish, or beyond what the market expects, we could get a little more volatility this week.