Originally published by AxiTrader
The gap between the data flow, which had previously supported stocks in this Trumponomics rally, and the level of US stock prices continued to widen last week after US economic prints continued on the weaker side of expectations.
Of course US Q1 GDP came in at 0.7% annualised against the market's expectation of a 1% print. And of course, the collapse of consumer spending growth to just 0.3% in Q1 were the big headlines. But it is the overall collapse in the data flow as captured by the Citibank economic surprise index which really shows how things have changed and fast!
Whereas previously it was the data which supported the Trumponomics rally that is no longer the case. It makes the rally vulnerable to setbacks if this soft patch in Q1 - which was widely anticipated by most pundits, the Fed included - looks like it is continuing into Q2.
That means the signal from the FOMC this week along with crucial PCE, ISM and non-farm payrolls is critical to the outlook.
But a major salve to this weakening trend in data flow has been the material improvement in corporate earnings over the past few months. With around 58% of S&P constituents having reported earnings FactSet says that a greater than average 77% are beating expectations.
More encouragingly for the stock market bulls is that Factset also says expected growth in earnings has lifted from 9% at the end of March to an estimated 12.5% year on year once all of the remaining companies have released their results.
"If 12.5% is the actual growth rate for the first quarter, it will mark the highest (year-over-year) earnings growth for the index since Q3 2011 (16.7%), and it will mark the first time the index has seen (year-over-year) double-digit earnings growth since Q4 2011 (11.6%)" Factset said.
How corporate America turns such an anaemic growth rate into such a stellar earnings performance is hard to fathom. It's impressive cost control and margin management.
But another chart I saw from Factset also suggests prices are fairly elevated relative to history.
Factset said that in a valuation sense "the forward 12-month P/E ratio for the S&P 500 is 17.6. This P/E ratio is above the 5-year average (15.1) and the 10-year average (14.0)".
It's a warning that valuations remain stretched and stocks are vulnerable.
But shorting this market has been a grave yard for many. That said it remains my medium/long term view that a significant top in the S&P 500 is likely to have been formed - or will be - between 2400 and 2450 when I look at the monthly chart since 2009.
Have a great day's trading.