TRUCKEE, Calif. — The primary driver of stock prices is corporate earnings. Each quarter, companies report their earnings for the prior period.
In the first quarter, the S&P 500 was up more than 10 percent and by historical standards that was an exceptional start for the year.
Based on averages, April is usually a good month for stocks. In fact, there is an old stock market saying to that effect, it is, “sell in May and go away.”
That quote goes way back in time and comes from the fact that in most years, the market makes the majority of its return for the year in the period that runs from November 1 to May 1.
What the market does this April will be largely determined by the corporate earnings reports that will begin this week. Alcoa is usually recognized as the first company to report and start the earnings season, but actually there are a few companies that will have already reported by the time Alcoa’s quarterly numbers are released.
One interesting thing about this quarter’s reports is that the market is at all time high. The Dow and the S&P 500 have recovered their losses from the 2008 recession and have just recently surpassed their all time record high price levels set in the fall of 2007.
Another interesting fact is that earnings expectations are actually pretty low. According to FactSet, S&P earnings are expected to decline slightly this quarter. The earnings drop is supposed to be about -0.8 percent.
The estimates for earnings growth were about 2.2 percent at the end of 2012 and have been revised downward since then. The sectors forecast to decline the most are energy, information technology, health care and industrials. Health care was the leading performing in the first quarter, leading all other sectors with a growth rate of 15.2 percent.
Since earnings are predicted to decline somewhat and the estimates have been revised lower, that could be good news for the market because it means that the bar has basically been set pretty low.
Upside earnings surprises could be a catalyst for some market rallies and earnings disappointments are already built into the prices to some extent, so reports will have to be quite a bit lower than expected to be a genuine disappointment.
It will be interesting to see how this quarter’s earnings come in and whether or not the market can continue making new record highs.
Kenneth Roberts is a Truckee based Registered Investment Advisor. Information on his money management service can be found at his blog at www.sellacalloption.com or by calling 775-657-8065. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.