The U.S. Stock Market, as measured by the S&P 500 (CME:SPM14) index, has now gone nearly two full years without seeing a 10% correction, despite concerns about deflation, inflation, government shutdowns, Fed tapering, China slowing down, and unrest in Crimea, among others. With the U.S. entering the meat of another quarterly earnings season, it’s worth revisiting the fundamental and technical drivers of the market.
Fundamentals: A Weak Start to Earnings Season
As my colleague Kathleen Brooks noted earlier this week, equity P/E ratios are slightly elevated, but far from historically dangerous levels. There are some longer-term concerns with elevated profit margins and multi-year valuation measures, but the biggest concern for shorter-term traders is the current earnings season, which is shaping up to be one of the toughest in recent memory due to inclement weather in Q1.
According to data from Factset, 66% of the 82 companies that have reported earnings thus far have beat analyst estimates for earnings and 50% have exceeded consensus revenue estimates. While these numbers may initially sound solid, they compare unfavorably with the 4-year averages of 74% for earnings and 58% for revenues. In fact, the S&P 500 is on track for its first decline in average earnings since Q3 2012. With nearly one-third of S&P 500 companies (161 firms) scheduled to report earnings this coming week, traders will be keeping a close eye on whether these trends will continue.
Technicals: Leading Indices a Possible “Canary in the Coal Mine”?
At first glance, the technical picture for the S&P 500 remains strong. The index is still within a rising bullish channel that dates all the way back to February of last year , and all three major moving averages (50-, 100-, and 200-day) are in consistent uptrends.
Meanwhile, the RSI indicator has just found support in the key “40” zone, indicative of an overall uptrend. There was a small bearish RSI divergence near the recent highs, but the index uptrend has easily weathered similar divergences in the past.