Growth Expectations Evaporating

Stocks are seeing another big sell-off with the immediate catalyst being nothing more than fresh weakness in oil prices that is pushing the commodity to multi-year lows. Stocks have been moving in-sync with oil prices lately, with market participants interpreting oil’s fall as not only a function of the commodity’s own supply-demand fundamentals, but also as a read on the state of the global economy.

But it’s not all about oil, as a number of factors have come together in recent days to give us the sell-off. These include—besides the aforementioned oil market rout and the associated fears of major credit events in that sector—the global growth worries in general and concerns of a sharper slowdown in China to the start of the Fed tightening cycle.

While the global growth and oil worries are inter-related, none of these, including the Fed, is new—market participants have been sizing them up for the last couple of years. But they have all come to a head in the New Year.

So where does it all stop, and where do stocks get support? Market technicians answer this question based on what they see on charts of prior price movement, with a number of ‘support levels’ being bandied about, one being right around the 1870 level for the S&P 500 index.

No one has a crystal ball, but my sense is that stock market stability will only return only after we see clarity on the global macro questions that have been weighing on sentiment. Oil is an imperfect proxy for these global macro questions, but market participants have been treating it as one lately and as long as oil prices keep going down, we shouldn’t expect stock prices to stabilize.

The earnings backdrop isn’t helping market sentiment either, with earnings growth in the ongoing Q4 earnings season expected to be negative for the third quarter in a row. The Q4 earnings season ramps up in a big way next week, but the early going from the Finance sector has largely been good enough.

This morning’s strong numbers from Goldman Sachs (GS) are just the latest from the major financial institutions who have done an excellent job in an otherwise tough environment for the sector. The tough backdrop for Finance is spotlighted by recent movements in long-term treasury yields, with the 10-year dipping below the 2% level this morning.

The disconcerting part about earnings is that the growth weakness isn’t restricted to 2015 Q4—estimates for the current and coming quarters have also started coming down in a big way in recent days. In fact, we are starting to see a replay of what happened to earnings estimates last year—growth expectations are evaporating right in front of our eyes.

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