Monday, June 6, 2011
With the economic calendar on the thin side today, stocks will likely struggle to shake off last week’s negative momentum. In fact, following last week’s data deluge, we don’t have much of significance on the docket this whole week. As such, the tone of market discourse in the coming days will reflect the negative run of news flow in recent days.
The debate in the market lately has been centered on the economy’s near-term growth momentum. Last week’s data consistently supported the view that the first quarter’s sub-par growth pace has carried into the current quarter as well. As a result, growth estimates for the current quarter have started coming down in recent days.
The blame for the slowdown generally gets assigned to temporary factors, such as the effect of high fuel costs and lingering supply-chain disruptions from the Japan disaster. With these headwinds expected to reverse course going forward, growth expectations for the second half of the year have held up thus far. But the trend reversal on the manufacturing and labor market sides, which were thus far key drivers of the recovery, increases the odds that second-half growth estimates will come down as well.
Related to the second-half growth outlook for the economy is the question of corporate profits. Earnings growth remained strong in the first quarter, even as the economy expanded at a sub-par pace. Expectations for the second quarter have remained on track even as the macro picture, not just here in the U.S. but also in key emerging markets, has softened in recent days. With the second quarter earnings reporting season about a month away, it is not unreasonable to have some concerns on the earnings front as well.
The usual summer doldrums aside, stocks have to deal with a lot of questions in the coming days. And with no major catalysts in sight, these questions will likely keep on the downtrend.
Sheraz Mian
Director of Research
Zacks Investment Research
