Will The Earnings Recession Continue?
Today’s Spotlight Market
Stocks continue to take a pounding to start the year, as the shockwave from the Chinese stock meltdown continues to reverberate in the markets. The fear that the economic slowdown will spread from China to the rest of Asia and beyond has triggered heavy selling pressure. However, US economic data and corporate profits do not appear to support such a pessimistic response from traders, at least to this point. It is likely the psychological impact of the once seemingly invincible Chinese economy continuing to falter that has triggered emotional, rather than rational selling.
Fundamentals
Stock traders have been driven by pessimism to start the year, despite US economic data being largely positive. Non-farm payrolls data showed a healthy increase in December payrolls, as well as an upward revision to November numbers. December?s payrolls exceeded analyst estimates by 92,000, while the November revision added 50,000 jobs to the previously reported figure. All economic reports seem to point toward slow, steady expansion for the US economy. Furthermore, the Federal Reserve seems to be in no rush to raise interest rates, given the drop in Oil prices. Lower energy costs may delay inflation to the Fed?s 2% target, which could delay further rate increases. Outside of the energy sector, lower petroleum prices could have a beneficial impact on corporate profits. Many traders, however, are not very optimistic about corporate profits in Q4. According to a Bloomberg poll, stock analysts are looking for a 7.2% drop in corporate earnings in Q4 of last year, extending the ?profit recession.? If the analysts are correct, it would mark the worst earnings for corporate America in over 6 years.
Technical Notes – View Today’s Chart
Turning to the chart, we see the March E-mini S&P contract progressing toward the August sell-off lows near the 1850 level. This support level could be seen as fairly significant and could result in further declines. The recent sell-off has resulted in oversold conditions on the RSI indicator.
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