The S&P 500 rebounded 1.4% on Tuesday in a hallmark buy-the-dip trade that saw many of Monday's worst performers become Tuesday's best performers. To that point, gold prices increased 1.9%, the basic materials sector (+1.9%) led all economic sectors, and the Dow Jones Transportation Average surged 2.2%.
However, just as there wasn't any follow-through selling interest on Tuesday, there isn't any follow-through buying interest this morning. The S&P futures are down 11 points and are trading 0.8% below fair value.
While this week's action so far has made it difficult to put too much stock (no pun intended) in any explanation of the market's behavior, it appears this morning that sentiment has shifted on account of the following:
- Rumors that the sovereign debt of Germany and/or France could soon be downgraded (note: yields on their benchmark instruments have fallen, not risen, today)
- An FT article highlighting the view from a senior Chinese audit official that local government debt has spiraled out of control and that things could end up being worse than the fallout from the US housing bubble
- Renewed selling pressure in the commodity space, accented by a 3.3% decline in copper futures; and
- A battery of earnings reports that painted a picture of relatively weak demand
Per usual, most of the companies reporting earnings since yesterday's close have exceeded the Capital IQ consensus estimate. The notable exception was Bank of America (BAC), which fell short by two cents. What struck us about the reports is how weak the top-line growth was in the first quarter for many companies on the reporting docket.
|Company||Symbol||Q1 Rev Growth (Yr/Yr)|
|Bank of America||BAC||5.4%|
|St. Jude Medical||STJ||-4.1%|
This is of course just one slice of the earnings reporting action, yet the weak revenue growth cuts across many industry groups. Positive earnings surprises, therefore, are being engineered in a number of instances by cost cuts, share buybacks, and lower tax rates. So, the quality of the earnings surprises overall hasn't been that impressive so far.
The market has looked beyond such things in past quarters, but with the run many stocks have enjoyed since mid-November, it is creating a stall factor at this juncture and making it difficult to extend those gains.
Burgeoning worries about slowing economic activity, which have manifested themselves in weakening prices of base metals -- the building blocks of industrial growth -- are posing an added challenge since they are calling into question the double-digit consensus earnings growth forecasts for the back half of the year.
So, rumors come and go each day. Some turn out to be true, but most don't. The S&P futures could be under pressure because of the rumors about Germany and France that appeared to have knocked European equity markets lower.
One shouldn't discount the possibility, however, that there just might be some growing attention to the weak demand picture embedded in the first quarter earnings reports (and perhaps validated by the downturn in commodity prices).