Corporate Earnings Send Stocks on Biggest Rally Since 2004
Global stock markets saw major rallies during the week, with the S&P 500 extending its weekly winning streak to a number that has not been seen since 2004. Most of the optimism was generated by strength in corporate earnings releases, with Starbucks, Halliburton, and Proctor & Gamble showing some of the largest gains during the period. Macroeconomic data was supportive as well, with business confidence numbers out of Germany surpassing analyst forecasts and bringing renewed signs of recovery in the European region.
More broadly, the S&P 500 moved to reach highs above the 1500 mark for the first time since 2007, but fell just short of this level at Friday’s close. These valuations are significant because we are now trading at levels that have more than doubled the Credit Crisis trough seen in 2009 (which was the lowest level in 12 years). Helping to propel these gains are corporate earnings (which have showed solid growth for 3 years) and commitments from central banks around the world to maintain low interest rates and implement stimulus programs to prevent financial shocks. At the moment, the S&P is only 4% lower than its all-time highs of 1565, which were seen in October of 2007.
All Eyes on Corporate Earnings
As expected, corporate earnings became the main driver of market activity during the week. At this stage, more than 75% of the companies that have released their 4th quarter profits have managed to surpass analyst expectations. We are still less than half-way through the season, however, as only 147 of the S&P companies have released their reports. So, essentially, this means that these earnings stories will continue to have a major presence in the next stock moves we see.
Analyst projections for the remaining results continue to grow more optimistic, with the average expectation for profit growth now seen at 4%. This is a substantial improvement from the 2.9% expectation that was seen before the season began. Looking ahead, we have a busy week with Non Farm Payrolls, the next FOMC meeting and another round of bellwether earnings reports to guide sentiment. Non Farm Payrolls are expected to show a monthly increase of 168,000 jobs (up from 155,000 the previous month). No major changes are expected at the FOMC policy meeting but any suggestion that stimulus programs will have an end-date will likely weigh on stocks. In earnings, the major releases will come with Caterpillar, Boeing, Facebook, Amazon, Pfizer, and Exxon Mobil.
We are looking at major long term tops in most of the major stock indices, with resistance levels thin in the S&P 500, DAX, and FTSE 100. With increased volatility expected next week, spread betting traders should have an opportunity to re-enter long positions at lower levels. When looking for “buy zones,” watch 1470 in the S&P, 6140 in the FTSE, and 7810 in the DAX. Longer term momentum is clearly positive in all three indices but we will need to see some cheaper areas before entering positions, as this will improve risk to reward ratios.
About Richard Cox
University Teacher in International Trade and Finance. Specialty in technical/fundamental analysis of the commodities and currencies markets.