Dow, S&P 500 At Record Highs; 2Q 2014 Earnings Season In Focus


Following Thursday’s better than expected non-farm payroll report combined with bullish talk across the Atlantic from ECB President Mario Draghi about the European Central Bank’s willingness to use “unconventional measures” to fight low inflation, the Dow and the S&P 500 reached all time new highs on Thursday afternoon during a shortened holiday week.
     The Dow settled to a new high of 17,068 and the S&P 500 climbed to 1,985 before the closing bell.
     The Nasdaq closed at 4,486 on Thursday and remains within striking distance of 4,572, an all time record reached in January 2000.
     The week ahead will see the market preparing for corporate earnings season in the U.S. with Alcoa kicking off earnings season on Tuesday followed by the release of Fed minutes on Wednesday.
     According to Reuters, Wall St. is forecasting earnings to rise 6.1 percent during the second quarter of 2014 from companies in the S&P 500.
     Economists from Bloomberg expect earnings from companies in the S&P 500 to grow around 5.2 percent during the second quarter of 2014.
     Factset estimates earnings growth of 4.9 percent during the second quarter of 2014 with 84 companies issuing negative EPS guidance and 27 companies issuing positive EPS guidance.
     Factset reports the telecom service sector is expected to show the highest earnings growth for the quarter in contrast to the financial sector which is expected to show the lowest earnings growth for the quarter by sector.
     After ECB President Mario Draghi’s latest signal to use “unconventional measures” including the purchase of large scale assets to fight disinflation in the 18 member euro-area bloc along with positive U.S. economic data arriving each week showing the U.S. economic recovery is firmly intact after a shaky first quarter start in 2014, investors are watching for any major changes with U.S. monetary policy, most notably when the U.S. Federal Reserve will begin raising short term interest rates with the their federal funds rate which remains at a historic low of .25 percent since the recession in 2008.
      Since the U.S. unemployment rate has already fallen to 6.1 percent, ahead of the Fed’s forecast, some economists are expecting the Federal Reserve to begin raising short term interest rates sooner than expected in 2015.
     JP Morgan’s Mike Feroli believes that after a strong June non-farm payroll report, the Federal Reserve could begin tightening interest rates as early as Q2 in 2015.
     “Indeed, after today’s’ report a Q2 tightening seems plausible. If the unemployment rate continues the recent surprising pace of descent such a move is even likely; nonetheless, we hope and believe better productivity and labor supply outcomes will slow the pace of decline in unemployment in coming quarters” Feroli recently wrote to clients.
     “We are pulling forward our projection for Fed tightening (the first time we have done so in recent memory); we now see lift-off occurring in 15Q3, rather than 15Q4. For year-end 2015 we see the funds rate at 1.0%, for 2016 2.5%, and for 2017 3.5%.” Feroli added.
-Johnathan Schweitzer
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