This market has run out of catalysts that can help it break out of its trading range. The balance of risks will likely remain to the upside, with the breakdown in the tech, biotech and broader small-cap space threatening to bleed through to the broad large-cap indexes which have thus far remained in the positive.
The Q1 earnings season is now effectively behind us, with the retail sector as the only one with any significant number of reports still to come. Going by the more than half of the retail sector reports that we have seen already, the coming reports are unlikely to move the needle much for the sector or the earnings season as a whole. Including this morning’s Ralph Lauren (RL) and last evening’s CBS (CBS) and News Corp (NWSA) earnings reports, we now have Q1 results from 451 S&P 500 companies.
There has not been much growth, and estimates for the current period have been following the same negative trend that we have been seeing for almost two years now. We will have to wait for the June quarter earnings season to gain more confidence in the relatively favorable outlook for the back half of the year and beyond.
[Read More: Visualizing GDP: Dissecting the Third Estimate Upward Revision]
We don’t have much on the economic docket next week, but the April Retail Sales and Industrial Production numbers coming out will likely reconfirm the rebound in activity levels in the current quarter that we have been seeing all recent economic reports. U.S. GDP growth flat-lined in Q1 in the advance look and subsequent data appears to push it into negative territory.
But estimates for Q2 show a strong rebound, with consensus estimates of GDP growth north of +3% at present and some of the more aggressively optimistic forecasts as high as +5%. The outlook for the second half of the year and beyond reflects comparable optimism, with U.S. economy expected to finally ‘graduate’ to an above-trend growth.
Hard to deny the U.S. economy’s positive momentum in the current period, but not everyone is buying into the supposedly favorable outlook for the second half and beyond. That’s the way how most people will interpret the bond market’s reaction to recent positive economic data. The bond market isn’t infallible and has taken wrong turns in the past, but stock market investors appreciate that summarily dismissing its view may not be the smart thing to do. Stocks need at least a few more months of data to have greater confidence in its optimistic view.
