Will Earnings Season Halt the Bull Market?

We have reached a critical point for corporate America. After six years of cutting expenses, buying back stock and using cheap financing to boost share prices, it’s time to see which firms will be able to make money the old fashioned way: by selling more of their goods and services. That’s going to be tough due to a trifecta of factors, which include plunging oil prices, a stronger U.S. dollar and rotten winter weather. Those factors mean that estimates for the first quarter are not too rosy. Analysts predict that earnings for S&P 500 companies dropped by nearly 5 percent from a year ago, down from an expectation of more than 4 percent growth at the beginning of the year. If Q1 is as grim as expected, it would be the first year-over-year decline since the third quarter of 2012.

One of the big headwinds has been the 50 percent dive in oil prices since last June, which will likely translate into a more than 60 percent drop in the energy sector’s earnings per share from a year ago. Excluding energy, things don’t look so bleak, with an expected 3.4 percent increase.

It’s not just oil that made Q1 tough: the impact of a stronger U.S. dollar caused headaches for American exporters, whose products have become more expensive in global markets. The 29 percent gain of the greenback against the euro and 18 percent versus the Japanese yen has also hurt overseas profits that are converted back to dollars by U.S. multinational corporations.

And then there’s the weather. In a less damaging repeat of last year, the rough winter in parts of the country (according to the National Climatic Data Center, the Northeast suffered its coldest winter ever this year) kept consumers on the sidelines. As a result, the U.S. economy probably grew by just 1 - 1.5 percent on an annualized basis. That’s a big reduction from early January, when economists’ projected growth at a 3 percent pace.

But like last year, which got off to a rough start, most analysts believe that the rest of 2015 will show improvement. The range is now for a rate of 2.5 to 2.8 percent for all of 2015, slightly ahead of last year’s 2.4 percent rate. Activity should improve as household incomes rise and the effect of lower oil prices helps consumers’ bottom lines.

One other bright note that could also lift the economy in the months to come: after a number of fits and starts over the past 18 months, the housing market is poised to show improvement. The combination of underlying strength in the labor market, affordable mortgage rates and the reduction in FHA borrowing requirements and costs is expected to bring more first time homebuyers into the market. Additionally, many buyers who went through foreclosures, bankruptcies or short sales during the downturn now have repaired their credit enough to qualify to buy a home again. RealtyTrac predicts that about half of the 7.3 million who lost their homes to foreclosure or short sales from 2007 through the end of 2014 will return to the market and buy a house. In this year alone, there could be at least 250,000 of these so-called “Boomerang Buyers”.

MARKETS: There’s been a lot of chatter about whether or not this bull market run is looking tired. Since bottoming six years ago, the S&P 500 is up about 250 percent, including the reinvestment of dividends. With stocks trading at 17 times forward earnings, they are by no means cheap, though that doesn’t mean that a crash is imminent; rather it does argue for investor caution and diligent rebalancing.

• DJIA: 18,057, up 1.7% on week, up 1.3% YTD
• S&P 500: 2102, up 1.7% on week, up 2.1% YTD
• NASDAQ: 4,996 up 2.2% on week, up 5.5% YTD
• Russell 2000: 1231, up 0.7% on week, up 5% YTD
• 10-Year Treasury yield: 1.95% (from 1.84% a week ago)
• May Crude Oil: $51.64, up 5% on week
• June Gold: $1,204.60, up 0.3% on week
• AAA Nat'l avg for gallon of regular Gas: $2.39 (from $2.39 week ago, $3.62 a year ago)

THE WEEK AHEAD:

Mon 4/13:

Tues 4/14:

JPMorgan Chase, Wells Fargo, Johnson & Johnson

8:30 PPI

8:30 Retail Sales

9:00 NFIB Small Business Optimism Index

10:00 Business Inventories

Weds 4/15: TAX DAY

Bank of America, Charles Schwab, U.S. Bancorp, Delta Air Lines, Netflix

8:30 Empire State Manufacturing

9:15 Industrial Production

10:00 Housing Market Index

2:00 Fed Beige Book

Thurs 4/16:

Citigroup, Goldman Sachs, Schlumberger, UnitedHealth

8:30 Housing Starts

10:00 Philly Fed Survey

Fri 4/17:

General Electric, Honeywell

8:30 CPI

10:00 Consumer Sentiment