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Recent Weak Economic Data Lowers Confidence in Economy

Investors continue to believe forecasts that show the economy is on the verge of experiencing explosive growth, until the actual data proves otherwise. Indeed, recent reports revealed weakness across the retail sales, inventory and payroll spectrum, hinting at both a reduction in Q1 GDP growth – as well as the possibility of an outright contraction – and downside risks to Q2 GDP forecasts. The flat April retail sales figure, plus tiny ex-auto advance and small March increase, signaled another disappointment despite cheap gasoline. What’s more, the Atlanta Fed reduced its Q2 GDP estimate to 0.7%, placing it well below the consensus by Blue Chip economists. As a result, a lack of economic confirmation continues to corral our confidence.

With 454 companies in the S&P 500 having reported Q1 2015 EPS, S&P Capital IQ aggregate estimates now see a 2.9% growth in EPS, up 49 basis points from last Wednesday and a turnaround from the 3% decline estimated on March 31.

S&P Capital IQ S&P 500 EPS Growth Estimates

From a technical perspective, things look a bit more encouraging. The S&P 500 remains within reach of its breakout level at 2126. Upon a break higher by the S&P 500, the Russell 2000 should offer confirmation that a larger leg higher in stocks is underway. Given the duration of time that the markets have spent range bound, the move out of the range will likely be a persistent one that should trend in the direction of the break. The VIX remains below 15, which is supportive of upside movement as the long-standing, multi-year rally has been in force with the VIX below 15 for most of the legs higher over that time. Finally, the US Dollar Index has broken below support at 94.00-95.03. This shifts the short-term bias to bearish favoring additional decline targeting 91.85-92.63 and potentially 87.21-88.83.

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