US stocks recovered last week on expectations that US interest rates will rise later in the year and stock buybacks and dividend increases will boost shareholder returns. The S&P 500 has made it back above 2,100 and the Dow Jones Industrial Average moved through 18,000, both key price levels beneath record highs.
Federal Reserve speakers are still referring to a 2015 rate-hike but have acknowledged the recent slowdown in the US economy and the difficulties it faces from a rising US dollar. A rate-hike this year still seems the most-likely scenario but the Fed’s data-dependency means it is not a foregone conclusion. That keeps the hope alive for markets.
US corporate earnings are expected to decline for the first time in six years in the first quarter. An earnings decline is hardly a welcome development, especially when P/E ratios of major indices are at decade-highs. However, the rally in US stocks last week supports the idea that it may not be a disaster.
Central bank support is still very much present in the US and overseas and major American companies are returning record amounts to shareholders through share buybacks and dividend increases. This is typified by the $50bn retuned by GE on Friday. The rise in mergers and acquisitions can also be a source of confidence for markets.
The market reaction to the earnings season is typically a reflection of results versus expectations. Expectations have taken a beating leading into Q1 reporting but this may be a good thing. Corporations have proven very adept at lowering guidance in order to beat it. Even if average income does decline amongst top US companies, if lowered expectations are beaten, the market might come through the next couple of months unscathed.
Commerce Bancshares Inc (NASDAQ:CBSH) and Pep Boys-Manny Moe & Jack (NYSE:PBY) report earnings on Monday but the real action starts tomorrow with JPMorgan Chase & Co (NYSE:JPM), Wells Fargo (NYSE:WFC), Johnson & Johnson (NYSE:JNJ) and Intel (NASDAQ:INTC) all reporting.
Futures suggest the:
S&P 500 will open 3 points lower at 2,099 with the
Dow Jones expected to open 19 points lower at 18,038 and the
Nasdaq 100 3 points lower at 4,419.
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