Will Margins Come Under Pressure?

By: Kent Engelke | Capitol Securities

Equities advanced as focus was turned to profits and away from geopolitical tensions. Analysts are expecting results to increase anywhere between 17% and 19%. Perhaps the only definitive statement to make is short falls will be met with selling. Conversely because of huge expectations, profits must exceed the consensus view to advance.

I point to last week’s release of several mega-sized financials whose profits met expectations, but were greeted with general disappointment as evidence.

Late yesterday, Bloomberg wrote the odds are low earnings will quell volatility. The newswire states of the 29 S & P 500 companies that have thus posted earnings, all 29 “saw shares trail in the first day reaction…falling an average of 0.7%.” Bloomberg further writes tech stocks fared the worst “with shares falling 3.6% despite considerably better than expected results.”

As widely discussed, the PE for the S & P 500 is still selling at 21x earnings and data dating back to 1950 indicates any continuing advance may be difficult as this stage.

Some of the hurdles the averages could face are general inflation in production components and wages, both of which could be difficult to pass onto the consumer in the proverbial race to the bottom in today’s “cost is the only determinate of purchasing decision” environment. In other words, margin compression from today’s near record levels.

It is widely accepted the lack of wage inflation is a major reason for the rebound in corporate profits since the end of the Great Recession.

What will happen today?

Last night the foreign markets were up. London was up 0.20%, Paris was up 0.43% and Frankfurt was up 0.79%. China was down 1.41%, Japan was up 0.06% and Hang Sang was down 0.83%.

The Dow should open nominally higher ahead of earnings. To write the obvious, there is no shortage of catalysts to potentially roil the markets. The 10-year is off 1/32 to yield 2.80%.

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