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Neighbors of DuPage

Market commentary

May 28, 2015 08:55AM ● Published by Katelyn Nelson

Low energy prices

Lower energy prices for consumers are like a tax cut that should help support earnings for the consumer sectors. Lower fuel costs also help lower transportation costs, which may benefit railroads, airlines, and shipping logistics providers (though lower fuel surcharges may mitigate benefits).

Stellar cost management

Profit margins for S&P 500 companies remain near record highs and probably held up well overall during the first quarter of 2015. Wage gains are the biggest component of the S&P 500 companies’ costs, and wage gains remain moderate at about 2% despite the drop in unemployment (based on the March 2015 jobs report). Commodity prices are another big corporate cost and those prices—even beyond oil—continue to fall. The Bloomberg Commodity Index has fallen about 4% year to date after a double-digit decline in 2014. And borrowing costs remain low.

European growth picking up

This one is a double-edged sword, because one of the reasons European growth is picking up is the weak euro and its effect on European exports. That same weak euro (and corresponding strong dollar) is a drag on profits earned in Europe translated back into dollars. Nonetheless, on the margin we expect a good number of U.S. multinationals to cite improved economic conditions in Europe.

(Slightly) better environment for financials

Increased volatility helps the trading divisions for the big money center banks and brokerage firms. Currencies are likely to prove particularly rewarding for the first quarter. The pace of legal settlements should continue to abate. And financials earnings fell modestly during the year ago quarter compared with first quarter 2013, potentially setting the stage for upside surprises with an easy comparison. Low interest rates still hurt but may be already factored into estimates.

ISM Signal hanging in there

Our favorite earnings indicator, the Institute for Supply Management (ISM) Manufacturing Index, has continued to signal earnings gains over the next six to nine months and offers an encouraging sign regarding where earnings may be headed. Although the index pulled back during March 2015 due to temporary factors, it remains in expansion territory at slightly over 50 (50 is the breakpoint between growth and contraction for the index) and well above the sub-40 levels that have historically signaled recession.

Conclusion

First quarter 2015 earnings will likely not be very good, due to the drags of low oil prices and the strong dollar. However, results for S&P 500 companies may exceed dramatically reduced expectations and we see better prospects for earnings as the year progresses. We continue to expect earnings to drive stock market gains in 2015, but investors may need to be a bit more forward looking.

 

Angelo Imbrogno is President of Blue Diamond Wealth Management.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is
no guarantee of future results. All indices are unmanaged
and may not be invested into directly.

Securities offered through LPL Financial.
Member FINRA/SIPC.

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