This week will be one of the busiest of the first quarter 2013 earnings season, with 130 of the 500 Standard & Poor’scomponents reporting earnings, or 25 percent of the index. In addition, we will have the Federal Reserve meeting Wednesday, and on Friday reports on March employment and consumer sentiment. With so much data to parse, stock investors will have plenty to think about, testing the wisdom of the old adage: Sell in May and Go Away.
Since the April 8 start to earnings season, the Dow Jones Industrial Average has gained 0.7 percent, while the S&P 500 has increased 1.2 percent, and the Nasdaq Composite Index is up 1.8 percent. Following the worst week of the year for stocks, this past week witnessed strong gains, with the Dow Industrials rising 1.1 percent, the S&P 500 up 1.7 percent and the Nasdaq up 2.3 percent.
Thus far, more than half of the S&P 500 companies have reported quarterly results, with 73 percent reporting earnings above the Wall Street expectations, while only 44 percent have reported revenue above consensus, according to FactSet, a financial data research company. While the percentage of companies exceeding expectations is about average over the past four years, the average percentage for exceeding revenue expectations is 57 percent, well above this season’s result.
The S&P 500 is on track for year-over-year earnings growth of 2.1 percent, with revenue declining by 0.6 percent, according to FactSet. Of the 59 companies that have issued earnings guidance so far, 48 of them, or 81 percent, have provided an outlook that falls below expectations. The five-year average is 61 percent, according to FactSet. Some of the most important earnings report due this week includeAetna, AIG, CBS, Comcast, CVS Caremark, MasterCard, Merck, MetLife, Pfizer, Time Warner, Viacom and Visa.
The weakness in the outlook for the second quarter and for the remainder of 2013 is concerning, especially given the growing impact of the sequester spending cuts, which are beginning to take effect, and with the May 18 expiration of the debt-ceiling suspension. The looming fight in Washington over raising the debt ceiling is sure to be highly contentious, and it is unlikely that either side will be willing to compromise, given the highly politicized nature of this debate.
Although the S&P 500 has gained 10.7 percent year-to-date, half of the S&P 500’s 10 sectors have seen a majority of their component companies underperform the index, according to the Standard & Poor’s Global Markets Intelligence (GMI) research group. The underperforming sectors are materials, energy, industrials, telecommunication services and information technology. Of the 222 issues in these sectors, 131, or 59 percent, are lagging the S&P 500.
Conversely, the health care, consumer discretionary, consumer staples, financials and utilities sectors have the lowest proportion of underlying companies lagging the index. With 278 issues in the index registering alpha, or market outperformance, to date, 71 percent of those can be found in these five sectors. The top five performing sectors are those with a majority of their component stocks outperforming the index, as one would expect.
What is most interesting about the sector performance year-to-date is that, contrary to what one would expect in a recovering economy, it is the defensive sectors that are outperforming, while the high-growth sectors, especially technology, are underperforming. This is quite telling with regard to the sustainability of the rally. We would expect to see high-growth sectors — and again, especially technology — leading the markets higher in a healthy rally.
As we enter May, investors will need to evaluate the health of the rally, and the current valuations for the major indexes in the context of this time of year. May historically is a month in which markets do not perform well. Summer is usually a time for lower trading volumes, as many investors, traders and industry professionals take vacations, winding down their market operations.
With the current bull market long in the tooth at more than four years in duration, the weakness revenues reporting so far for the first quarter, the impact of the sequester spending cuts, the pending debate on the debt ceiling, pricey stock valuations, seasonality, and a weakening outlook for so many companies, we have a compelling narrative for a sizable correction.
While I have been expecting a correction to occur since February, the Fed’s continuing bond purchase program — QE 3 (quantitative easing round 3) — of $85 billion per month has so far trumped all other negative influences on stocks. Will this massive amount of stimulus be enough to sustain the current stock market rally through May and into the summer — a period that traditionally has been challenging for stocks? We are about to find out!