LOSING A GRIP ON THE WALL OF WORRY

 
David Morris
CFD MARKET STRATEGIST, GFT

INVESTORS are struggling to keep abreast of all the major issues currently weighing on financial markets. Geopolitically, the situation in Libya is growing more desperate; tensions are still building across the Middle East; the disruption to Japan’s economy and global supply chains due to last month’s earthquake and tsunami has been severe. On top of this, the situation at the Fukushima nuclear facility appears critical.

On the economic front, after years of loose monetary policy, interest rates are rising around the world. The ECB is acting to curb inflation, which threatens the core Eurozone members, even as the peripheral countries struggle to grow thanks to rising bond yields and austerity measures. At the weekend, China hiked its reserve requirement ratio for the fourth time this year, despite news of sharp falls in house prices in Beijing and elsewhere. Then, suddenly, all eyes turned back to the US as Standard & Poor’s put the country’s debt rating on a negative outlook.

The major US stock indices are beginning to struggle as they climb this “wall of worry.” On top of everything else, they have a fresh earnings season to contend with. After an inauspicious start last week when Alcoa, JPMorgan, Google and Bank of America all managed to disappoint the market in one way or another, the first quarter earnings season now shifts up a gear. Over one fifth of companies in the S&P 500 report this week, and the pace accelerates through to the end of April. By 6 May, over 80 per cent of the largest 500 US corporations will have released their earnings and this could prove to be a major influence over how equities perform over the next few quarters.

US corporate profit margins are close to record highs. Earnings have grown following years of job cuts and other cost-cutting measures. Yet despite all the fiscal and monetary stimulus, the wider economy has failed to recover and analysts are cutting their GDP estimates for the year. Corporate profit margins are going to come under pressure as rising input costs take their toll, yet analysts’ earnings and revenue expectations remain elevated. So with US stock indices backing off from recent highs, a few significant earnings disappointments could mark the end of the two-year bull run.