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FactSet StreetAccount Summary - US Weekly Recap: Dow +1.42%, S&P +1.75%, Nasdaq +3.25%, Russell 2000 +1.25%

Apr 24, 2015


  • US equities finished higher this week, though conviction levels seemed fairly subdued. While this week marked the peak week of Q1 earnings season, there were no surprises surrounding the higher-level themes, particularly in terms of the drag on both March quarter results and guidance from FX. However, this dynamic was not a consistent directional driver. Positioning/expectations continued to play a key role in post-earnings performance, as did sentiment surrounding end-market exposure. The M&A theme continued this week with pharma and cable in the headlines. On the macro front, it was a much quieter week in terms of Fedspeak following last week’s barrage, though prospects for a later liftoff gained additional traction as US economic data continued to largely disappoint. While spillover effects remained limited, headlines surrounding Greece showed some signs of improvement before some renewed disappointment on Friday. In addition, China stocks extended their outperformance as the policy support dynamic remained in focus. Read-throughs from sector performance did not seem particularly meaningful as the earnings calendar drove the bulk of the outsized moves this week. Tech and telecom were the big gainers, though consumer discretionary also outperformed. Energy and consumer staples were the notable laggards. 

Peak week of Q1 earnings:

  • This week marked the peak week of Q1 earnings season. The one theme that continued to stand out across multiple sectors revolved around the pressure on results and guidance from dollar strength. However, FX was not a consistent determinant of performance. In addition, the extent to which concerns about currency depressed expectations going into results set the stage for some post-earnings rallies. This dynamic seemed to play a role in the outperformance of some large-cap tech names, including MSFT +15%, GOOG +7.8% and VMW +3.7%. Another higher-profile theme this week was the adverse spillover effects from oil weakness, particularly in terms of outlook commentary highlighting capital spending delays and reductions. This was an overhang on PNR (3.3%), though DOV +2.4% finished higher on the week. URI +0.2% also lowered guidance, citing softer oil and gas markets. End-market sentiment also played a role in post-earnings performance. Names leveraged to the auto sector like ORLY +7.2% and AN +2% outperformed. Companies with exposure to security spending like FTNT +14.7% and CHKP +7.1% were among the standouts. Despite all the scrutiny in the semi space, LRCX +8.6% benefited from its exposure to memory, while high-end smartphone exposure helped BRCM +2%. 

Earnings growth rate improves, revenue growth rate slips:

  • According to FactSet’s latest Earnings Insight report, with ~40% of the S&P 500 having now reported results for Q1, the blended growth for S&P 500 EPS stands at (2.8%). This is better than the (4.6%) expected at the end of the quarter. In addition, 73% of reporters have beat consensus EPS estimates, in line with the five-year average. The blended revenue growth rate now stands at (3.5%), worse than the (2.6%) expected at the end of the quarter. Only 47% have beat consensus revenue expectations, the lowest level in two years and below the five-year average of 58%. Some of the divergence seems to be a function of the extent to which FX headwinds have been a bigger drag than expected, while companies have been forced to get more aggressive in terms of expense control to protect earnings. While largely overshadowed by FX, oil, weather and port delay headwinds, another theme this earnings season has revolved around some margin support (and expectations for more going forward) from lower raw materials and other input costs. This has been seen in pockets of the market such as chemicals, food, restaurants and household products. 

M&A headlines mixed:

  • M&A largely took a backseat to the earnings calendar this week, though it continued to generate a lot of headlines. The pharma space remained the hot spot. The WSJ pointed out that according to Dealogic, there have already been ~$180B of pharma mergers announced globally this year, following the ~$280B in 2014 that was the most since it began keeping records in 1995. TEVA (0.8%) launched a $40B unsolicited offer to acquire MYL +9%. The offer came after MYL said late last week that a widely speculated combination lacked an industrial or cultural fit and also carried antitrust concerns. MYL this week boosted its own unsolicited offer to acquire PRGO (3.1%) to ~$33B in cash and stock, though it was rebuffed again. The cable group was another area of focus as CMCSA +2.1% and TWC +3.8% were forced to scrap their planned $45B merger due to regulatory pushback. However, news that the deal would no longer happen led to another wave of M&A speculation in both cable and the broader media space. There were thoughts that CHTR (0.4%) could make a move on TWC, while CVC +10.4% was mentioned as a target for CMCSA. The possibility of CMCSA turning its attention to a content acquisition was also discussed. 

Policy takeaways lean dovish:

  • While Treasuries gave back last week’s strength with yields finishing higher across most of the curve, policy takeaways still seemed to lean a bit more to the dovish side. NY Fed President Dudley (voter) highlighted the drag on growth from a stronger dollar and said that “hopefully”, the economic data will support a decision to raise rates later this year. The WSJ (Hilsenrath article) noted that dollar strength and the lack of traction in the global economic recovery have emerged as the key areas of concern going into next week’s FOMC meeting. It added that Fed officials have recently signaled a June tightening is increasingly less likely, while the market continues to grow even more skeptical about the prospects for a September move given the string of data disappointments. This week’s data continued to largely play into the risk of a later liftoff. Softer capital spending trends remained an area of concern as core durable goods orders fell 0.5% m/m in March after a downwardly revised 2.2% decline in February, marking the seventh straight monthly contraction. The machinery category remained under pressure, highlighting the fallout from the weaker commodity price environment. 

Greek headlines mostly better, China outperforms again:

  • In terms of macro, Greek headlines seemed to improve for the better part of the week. A government decree for state bodies to deposit cash at the central bank is expected to provide enough liquidity to get Greece through the end of May. In addition, heading into Friday’s Eurogroup meeting, Finance Minister Varoufakis hinted at some concessions on key reforms, signaling openness to some privatizations, an independent tax commission and pension system rationalization. However, headlines out of the Eurogroup meeting were somewhat disappointing, with Greece coming under criticism for failing to provide a comprehensive list of reforms. Eurogroup head Dijsselbloem noted that while some progress had been made, differences between Greece and its creditors remain wide. China stocks rallied for a seventh straight week with the Shanghai Composite up ~2.5%. The policy support dynamic remained in focus as the PBoC lowered the RRR by a more aggressive than expected 100 bp. Several officials also highlighted the need to do more. In addition, the CSRC denied speculation that measures announced last week to expand short-selling and tighten margin lending were intended to dampen market sentiment. 

Tech outperforms, energy lags:

  • Tech was the best performer this week on strength in the software and Internet groups thanks to some well-received results from a number of large-cap names. AAPL +4.4% was another standout into its results next week. However, mixed earnings and guidance weighed on the semi space with the SOX (0.3%). Telecom also outperformed with T +5.3% underpinned by moderating ARPU declines and better synergy guidance from the pending DTV acquisition. Retail, restaurants and media all helped drive the outperformance in growth, while homebuilders sold off as results from PHM (9.3%) and MTH (4.2%) disappointed against elevated expectations. Materials lagged despite a big rally in steel and global mining stocks with the bounce in iron ore. Precious metals came under pressure with the GDX (1.8%). The industrials also trailed the tape with some disappointing results from a few multis, including TYC (5.6%) and MMM (1.7%). Consumer staples underperformed with some sluggishness in the food group. HSY (5.6%) missed with China cited as a drag. It also reduced its full-year sales growth guidance, citing FX and lower organic sales expectations. Energy put in the worst performance despite the continued strength in oil (sector has been a big outperformer as of late). Coal and E&Ps fared the worst. 

Sector Performance (vs S&P 500):

  • Outperformers: Tech +4.07%, Telecom +3.43%, Consumer Disc. +3.12%, Utilities +2.39%
  • Underperformers: Energy +0.03%, Consumer Spls. +0.06%, Financials +0.50%, Industrials +0.76%, Materials +1.23%, Healthcare +1.45%
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