Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
Stocks are essentially flat on Tuesday with the Dow Jones Industrials Average (DJINDICES:^DJI) down 0.4% and the broader S&P 500 (SNPINDEX:^GSPC) lower by less than two points at 12:10 p.m. EDT. Two earnings "beats" from Dow components DuPont (NYSE:DD) and Verizon Communications (NYSE:VZ) were insufficient to provide any direction to the market at a whole. The same can't be said for DuPont itself -- its results were poorly received and it was among the worst performers in the Dow, down 2.8% at 12:10 p.m. EDT.
The problem for DuPont was not with the first quarter per se, at least not with regard to earnings. Indeed, the chemicals company generated earnings of $1.34 per share (excluding one-time items), which was $0.03 above the consensus forecast.
However, revenue of $9.2 billion was 9% lower year over year and short of the $9.4 billion analysts anticipated. DuPont said two-thirds of the revenue decline derived from "impacts from currency" -- i.e., the dollar's strength. Worse yet, the company said currency effects would reduce full-year earnings per share by $0.80, up from an earlier estimate of $0.60. That negative guidance is at the root of the market's reaction today.
Earnings season: The numbers so far
DuPont's case is representative of a broader phenomenon within the S&P 500. According to Bespoke Investment Group, a money management and research firm, of the roughly 200 companies that have reported earnings so far in this season, nearly two-thirds (64.4%) have beaten analysts' consensus forecasts -- the highest rate since the fourth quarter of 2010.
There are plenty of caveats to that observation. Keep in mind, for example, that analysts have taken pruning shears to first-quarter estimates (in response to companies' guidance): According to S&P Dow Jones Indices, the bottom-up estimate for S&P 500 operating EPS fell 13% in the first quarter; that was on top of a 4% decline in the previous quarter. Executives were very quick to point to the dollar's appreciation and the weakness of the price of oil (energy companies only) in lowering expectations.
This is simply another round of the old the parlor game in which companies guide lower in order to set themselves for an easy earnings "beat." That process is reflected in the fact that the S&P 500 earnings estimate broke its trend this month, increasing by 1% now that companies have begun reporting their results.
As I noted yesterday, the S&P 500's current earnings forecast equates to a 1% year-on-year decline. That wouldn't be a great result, but would be mainly a product of the vertiginous drop in the price of oil, with energy sector earnings projected to fall by nearly two-thirds relative to the first quarter of 2014.
However, as with DuPont, Bespoke Investment Group found that companies that have reported so far have had much tougher time with regard to their top line, with just 44% beating revenue estimates this season -- the lowest proportion since early 2009. Is it any wonder that the stock market is struggling to reach new highs? Already at premium valuations, stock prices are ill-equipped to absorb any speed bumps such as dollar strength and oil weakness.