The stock market rally is continuing to push higher, taking the broader market indexes into record territory. This has put skeptics like myself on the defensive. But the reality is that we aren’t seeing all-around celebration in the market as used to the case in the past. After all, we aren’t seeing Dow 15000 hats all around us. That said, main street headlines about such market milestones will likely prompt more investors to think about joining the market.
But it’s not just about the absence of Dow 15000 hats. There is plenty of evidence suggesting that investors are hedging their bets by investing mostly in the market’s defensive corners like consumer staples and utilities. Even though some of the hitherto laggards like the technology sector appear to be getting a second look in recent days, overall market leadership still remains with the defensive sectors. This is also evident from money-flow trends into the stock market, where hopes of the Great Rotation into stocks have yet to fully materialize. And money continues to flow into bond funds.
The U.S. Treasury department just had a 4-week treasury bill auction at no yield, in other words getting ‘free money’ from the market. What all this means is that the market wouldn’t be where it is had it not been for the Fed’s policies. Investors are betting that that as long as those policies remain in place, the stock market has nowhere to go but up. And recent economic data has been fragile enough to convince investors that the Fed is going nowhere any time soon.
Just like economic data, investors are more than willing to overlook earnings support for the market. The Q1 earnings season has provided plenty of evidence suggesting that earnings growth is now firmly in the rearview mirror. Granted Q1 earnings growth and surprises have not been materially different from what we have been seeing over the last few quarters, but revenue growth and surprises are materially weaker.
Total earnings for the 437 companies that have reported results as of this morning are up +3.7% from the same period last year, with 66.1% beating earnings expectations. Revenues are down -0.9%, with only 42.1% of the companies coming ahead of top-line expectations. The composite growth rate for Q1, where we combine the results of the 437 companies that have reported results with the 63 still to come, is for +2.4% growth in earnings on -0.8% lower revenues. This positive earnings growth rate compares to an earnings decline expected at the start of the Q1 reporting season.