Earnings, The Market’s Next Test
The earnings season will allow investors to focus on top-line revenue growth to assess overall demand for goods and services. Corporate guidance will help draw a picture of the economic backdrop, something that could corroborate the bond market’s view of the economy, or change its direction if guidance surprises to the upside. The first-quarter earnings season has companies cutting revenue guidance on a daily basis. The revenue picture, coupled with corporate guidance, will become increasingly important as we go through the year if global economic conditions continue to weaken.
With the Federal Reserve on an extended “pause,” markets have responded well, but sectors leading the market higher towards the end of the first quarter have come from both defensive sectors in addition to cyclical sectors, especially technology. It’s a market that has hedged itself as worries persist over the strength of the underlying global economy. Moreover, hovering over the market is the perception that the Fed may not have acted quickly enough, and a continued deterioration in growth leaves the Fed with very little in the way of ammunition in its toolbox.
The recession “tug-of-war” in the market won’t abate until there’s clarity in the data. A spate of unequivocally stronger data releases will challenge the bears, while the bulls will declare victory. Being pragmatic and careful while the market divines its next direction is prudent. The $4.5 trillion experiment that began 10 years ago is still not over. The easy part for the market was getting to $4.5 trillion, the hard part is getting back to what normal is supposed to be. But we will get there, crosscurrents notwithstanding.
Quincy Krosby is chief market strategist at Prudential Financial.