Economic data may breathe hope into US stocks

Earnings are still expected to be down for third consecutive quarter

NEW YORK: The March US employment report and other key economic numbers next week could help US stocks resume their recent winning path as long as that data hits the sweet spot. Not strong enough to add to worries about further interest rate hikes, yet not weak enough to cause concern about a recession.

Data on Friday, a market holiday, showed the US economic growth slowdown in the fourth quarter was not as sharp as previously estimated.

Reports on the housing market could also draw investors’ attention given recent sharp gains in homebuilder stocks.

Major indexes remain well above their 2016 lows, thanks to evidence of a reviving U.S. economy and a sharp rebound in oil prices, even as stocks broke a five-week streak of gains on Thursday, their last trading day before a long holiday weekend.

While the volatility that marked the start of the year has diminished and many strategists have adopted a cautiously optimistic outlook, the market seems to have paused.

The Friday US data showed that even as gross domestic product increased at a 1.4% annual rate instead of the previously reported 1.0% pace, corporate profits from current production fell $159.6 billion in the fourth quarter.

A catalyst for stocks could come from a rebound in corporate earnings.

“What we’ve seen over the past couple of weeks is really just a return to normal,” said Brad McMillan, chief investment officer for Commonwealth Financial in Waltham, Massachusetts.

Stocks’ next big move will largely depend on earnings, he said. “We’re kind of in a show-me phase, and it’s got to be earnings.”

First-quarter earnings estimates have collapsed since the start of the year, and in some cases may have fallen too far, possibly setting the stage for an upbeat profit season, McMillan and other market watchers said.

US earnings are expected to be down for a third consecutive reporting period, Thomson Reuters data show. Analysts now expect a first-quarter earnings decline of 6.9% - which would be the biggest drop since the third quarter of 2009 - sharply below the 2.3% gain they had been projecting as recently as Jan. 1.

Stabilising oil prices could at least slow the rate at which future earnings estimates fall, McMillan said.

Recent weakness in the US dollar could help, as well. US multinationals were hit hard by sharp gains in the US dollar last year but the dollar index .DXY is down 2.6% so far in the first quarter.

Published in The Express Tribune, March 27^th, 2016.

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