S&P Has Worst Week Since May 2012 10/10/14

 

  • S&P 500 Falls 3.1% this week
  • IMF cuts global economic growth forecasts
  • Rising dollar may impact U.S. Corporate profits

The S&P 500 lost 3.1% this week, its worst week since May of 2012.  The S&P has now fallen each of the last three weeks and is down more than 5.2% since its hit its record high on September 18th.  Today, chipmakers led the losses as Microchip Technology reported quarterly sales that trailed estimates, and this weighed on the overall market.  When the market gains momentum, positive or negative, it can lead to wide swings in stock prices and it is important to remember that healthy markets can experience volatility in the short-term.  This week also brought about the unofficial start of the corporate earnings season and a few notable reports include:

  • Alcoa (AA) kicked off earnings this week, posting stronger than expected earnings on aluminum price recovery and demand increases in auto and aircraft manufacturing.  The company also raised its guidance, as it expects the increased demand to continue.
  • PepsiCo (PEP) reported better-than-expected third quarter results yesterday, sending shares higher.  The company earned $1.36 per share, surpassing analyst estimates of $1.29 per share.  The company also raised its profit outlook for the year on price increases, cost cutting measures, and growth in emerging markets are expected to outpace slumping demand in developed countries.
  • Monsanto (MON) reported lower than anticipated earnings and also lowered its 2015 profit forecast as falling grain prices leave farmers with less money to spend.  Profits for 2015 are expected to rise 15% to $5.75 – $6 per share, but this trailed the average analyst estimate of $6.03 per share.  Also citing falling grain prices, tractor maker AGCO cut its full-year earnings forecast, as they are anticipating weaker demand as a result.

Many of the remaining S&P 500 companies will be reporting earnings over the next few weeks and most analyst are predicting strong quarterly results.  It will be very important to gauge the sentiment of corporate executives on the overall economy as they provide their forward guidance.

IMF Cuts Forecasts

The International Monetary Fund (IMF) cut its global economic growth forecasts this week, warning of weaker growth in core euro zone countries, Japan and key emerging markets.  In its World Economic Outlook report, the IMF cut its expectations for global growth to 3.3 percent in 2014 and 3.8 percent next year. The IMF had originally expected growth of 3.4 percent in 2014 and 4 percent in 2015.

While countries such as the United States are seeing stronger economic expansion, the IMF downgraded its forecasts for the three biggest economies in the euro zone  – Germany, France and Italy.  Germany industrial production fell more than economists forecast in August, dropping 4% from July, the biggest decline since January 2009.  The IMF cut its German economic growth in 2014 and 2015 to around 1.5% per year from its previous 1.9% and 1.7% estimates.

It also lowered growth projections for Japan and Brazil. The IMF indicated that potential growth in emerging markets is now 1.5 percentage points lower than what it estimated in 2011.  The IMF also warned that geopolitical tensions between Russia and Ukraine, as well as in the Middle East, continue to pose risks to the global economy.  With monetary policy reaching its limits, the IMF urged all countries to pursue structural reforms, such as improving labor market policies, increasing tax revenue collection and raising infrastructure spending.

Rising dollar and impact on earnings:

U.S. multinational firms may face headwinds as the value of the dollar continues to rise versus other currencies.   For U.S. companies with a large percentage of sales overseas, the rising dollar means a higher cost for the U.S. good and services in those foreign countries.   This may cause U.S. executives to lower their forward guidance as the outlook for the U.S. dollar appears to be strong as many other global central banks are trying aggressively to devalue their currency.