Wall Street May Be Getting Ahead Of Itself
February started off on the same foot: The Dow finished up Friday 149 points to 14,010 and the S&P 500 rose 15 points to 1,513.
But the market may have gotten ahead of itself.
Now that half of companies in the S&P 500 have reported fourth-quarter earnings, profit growth is expected to be up 5.8 percent, according to S&P Capital IQ. While solid, that's a smaller gain than a year earlier, and the slowdown could continue. Earnings growth is expected to slow to 1.7 percent for the first quarter.
Corporations continue to lower investor expectations. Of the companies that have issued earnings guidance for the first quarter, 82 percent have reduced estimates, according to FactSet. In response, analysts have sharply cut earnings growth expectations over the last month â¿¿ by half for the first quarter and by 16 percent for the second quarter."Earnings are not a reason to be buying stocks right now," Knapp says. Talley Leger, investment strategist at Macro Vision Research, notes that the stocks that have helped propel the market higher in January are companies in so-called "defensive" sectors â¿¿ such as health care providers and consumer staples producers. Those industries continue to perform well when the economy slows down because people still need to buy medicine and basic goods like shampoo and diapers. "The market is slowly starting to realize that an air pocket opened up between where stocks thought the economy was and where the economy actually was," Leger says. Leger and others predict a dip in the market sometime in the next three months as investors realize economic and corporate growth aren't quite as strong as predicted. But that could allow the stock market to grow again in the second half of the year. While the economy might not yet be ready to accelerate quickly, analysts remain confident that it will keep growing.
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