The weaker-than-expected economic data of late, combined with the forecast for two successive quarters of declines in S&P 500 operating earnings, have given ample reason for investors to drop the expectations bar to ground level. And since few can harm themselves by jumping from basement windows, opportunistic investors may cause the market to rally in the near term as actual results roll in. Historically, reported earnings have exceeded estimated results by two to four percentage points. With Q1 EPS expected to slip by 3%, this leaves open the possibility of a delayed first decline in earnings since the third quarter of 2009. Finally, today’s FOMC minutes didn’t add much to what was already known, other than confirm an already cloudy outlook.
S&P Capital IQ reports that aggregate S&P 500 EPS estimates call for a decline of 3.1% for the first drop since Q3 2009. Family Dollar Stores (FDO $80 ***) reported an EPS beat. Even though severe winter weather impacted sales in February, sales rebounded nicely in March. Five of 10 S&P 500 sectors are expected to show EPS gains, led by financials (10.9%), health care (9.1%), and consumer discretionary (7.3%), while energy (-63.7%), materials (-6.1%), and utilities (-5.1%) led decliners. This is also the first time since 2009 that five sectors were seen reporting EPS declines in a given period. Excluding the drag from energy, Q1 EPS would have risen 5.7%. For all of 2015, instead of the currently estimated advance of 0.1%, EPS would be expected to increase 7.5%.
From a technical perspective, the S&P 500 index has bounced off its critical support area at 2034-55 for a third time. Resistance remains to the upside at 2093 and 2119. A resolution above 2119 would re-establish the bullish bias, while a breach below 2034 would shift the bias to favor the bears. The breadth picture remains weak, however, showing the continued lack of robust upside participation, which leaves the index vulnerable to selling pressure. With the VIX near the 15 level, it is not suggesting any fear or expectation of increased volatility in the near-term. Separately, crude oil is working toward a shift to a bullish bias. The support at 47.36 held last week. A break above 54.24 would shift the bias to bullish and target a move to test the 57.50 level and potentially higher.