We ask you, readers, to name the single most important factor that has supported stock prices through all the turmoil over the last year. We bet more than half of you uttered “earnings” to yourself. Earnings have grown strongly in the last year, something that helped keep prices stable despite big geopolitical worries. However, there pillar of the market may now be crumbling as analysts have just turned the earnings outlook negative for the first time in three years. Analysts now expect first quarter earnings to decline by almost 1% from last year. By contrast, at the end of December, expectations were for a 3.3% gain. Most expect the weakness to come from margins, not top line growth.
FINSUM: Continued strong earnings were supposed to be one of the positives this year. If earnings sputter out, what is there to hold up the market in the face of so much uncertainty?
Wall Street’s so-called “fear gauge’, the Vix, has hit fresh highs. The figure, which represents the volatility of share prices as implied by options pricing, reached 24.6 on Monday, its highest level since the Euro crisis was at its peak two years ago. The move comes after almost two years of extremely subdued volatility, a time period which saw a major share price boom. The volatility was sparked by a succession of announcements, but most particularly, German industrial output numbers which showed the country was likely shrinking rapidly. Stocks have fallen sharply, with the S&P hitting new 8-month lows, the FTSE 500 in the UK at year-long lows, and with European stocks down double digits over the last few weeks. Oil has also tumbled, down to $81/barrel from being steadily over the $100 mark. Markets are also concerned over the uncertain effect that the end of the US Fed’s QE programme will have this month, including the possibility that heightened interest rates might hurt emerging markets.
FINSUM: The market has finally been jolted from its lotus-eating idealism of the last two years. The major question is whether this is a bump in the road on the way higher, or whether this is an intermediate signal of a heavy malaise to come.