What might have seemed to some like a rounding error for China’s first quarter economic growth metastasized into something worse, after news Monday that the Red Giant’s GDP grew 7.7 percent instead of the 8 percent investors expected. A typical lack of detail accompanying the release, as well as ongoing questions about its accuracy, were of little concern to commodity and stock investors who booked profits and headed for greener pastures. A rally in Treasuries has signaled the recent weaker tone of economic data globally, and this week was no exception, with the benchmark 10-year security rising again. Gold’s shellacking Monday amounted to 9 percent, its worst one day decline in 30 years, amid a free-fall that fed on itself as futures owners were hit with margin calls. Copper, long known for its ability to predict economic cycles, joined gold in a bear market that has some wondering whether this week’s 2 percent pullback in stocks could get worse. What’s clear to us is that stocks were due for a pullback after an almost uninterrupted march upward since last fall.
Investors received key inputs from corporate America this week, as 20 percent of the S&P 500 reported first quarter earnings. Blue chips were in the spotlight, and the results were decidedly mixed. A tally of key company earnings reports reveals that while most have delivered earnings above expectations, revenues have come up short in more cases than not. Tech companies Yahoo and eBay are good examples of companies whose earnings outperformance failed to be confirmed by top line numbers, and both stocks suffered as a result. Within technology overall, these companies have so far failed to deliver compelling enough results to refute the sector’s year-to-date underperformance. IBM laid an egg across nearly every facet of its business in reporting numbers that missed both top and bottom line expectations. The Dow component plunged 8 percent after citing order delays in mainframes as well as weakness in software, storage, and services.
Winning the Race
In contrast to technology, the one sector earning its keep so far this earnings season is consumer staples, and in this case, the preponderance of evidence supports its status as a market leader year-to-date. Beverage and salty snack powerhouses Coca-Cola and Pepsi both reported surprisingly strong results, despite a continued weak soft drink market domestically. International markets drove Coke’s beverage volume growth, up a surprisingly strong 4 percent in the quarter, while Pepsi’s Frito Lay unit delivered superior results once again. Revenues at both companies exceeded expectations, confirming the bottom line beats and sending the stocks to nice gains in a week of market declines. Global personal care titan Kimberly-Clark also delivered the goods, reporting superior top and bottom line results that boosted its stock by nearly 5 percent Friday. Philip Morris International, purveyor of cigarettes outside the U.S., was a notable exception, and a key reason for its earnings miss was currency. The stronger dollar that dented its earnings will undoubtedly have done the same for countless other multi-national companies that have yet to report.
Next week is the heaviest of the first quarter reporting season, when investors will see earnings results from 169 members of the S&P 500. As well, investors will glimpse the Commerce Department’s preliminary estimate of first quarter GDP, which most now expect to tilt the scales at somewhere near 3 percent growth.
Our Takeaway from the Week
- Stocks and commodities succumbed to weaker economic data internationally, as first quarter earnings reports failed to turn the tide