In yesterday’s session, stocks on Wall St ended modestly lower after concerns regarding proposed financial legislation and how it will hurt banks overshadowed good earnings numbers from Whirlpool and Caterpillar.
The Dow Jones Industrial Average was the best performer, finishing flat for the session. The NASDAQ retreated 0.3% while the broad-based S&P 500 declined 0.4%.
It seems the market is a bit nervous ahead of tonight’s testimony from Goldman Sachs and also the proposed financial regulation. The market should get a lot more clarity on these issues tonight. Ultimately two of the most important areas, company earnings and underlying economic data, are very strong. We might see some short-term weakness or choppiness, but we expect this underlying strength to drive markets higher in the medium term.
Looking at these factors in more depth, it is clear to see compelling valuations and strong earnings momentum coming through. With more than 80% of companies beating analysts’ estimates and with net income beating estimates by 22% on an aggregate number this could be a reason why we are seeing over 500 companies on the NYSE making new highs.
According to Bloomberg data, S&P 500 companies may earn $85.96 a share next year, only 4.4% below the record profits of $89.93 in 2007; this was when the S&P was 20% higher. Also, as a result of this positive earnings momentum, the S&P 500 is trading on 14.1x prospective earnings, the lowest valuation since 1990, with the exception of the immediate aftermath of the Lehman’s collapse.
In Asia, equity markets are mostly lower on the back of concerns that China’s steps to cool its rampant property market will weigh on demand for raw materials. As at 06:00, the Shanghai Composite is the worst performer, down 2.1% while the Hang Seng and Kospi are down 1% and 0.2% respectively. The Nikkei has recovered, up 0.2%.
Europe is following the Asian lead and is expected to start the day on the back foot. However, a run of economic data could well add further direction as the session continues. German GfK consumer confidence, UK home loan data and the CBI distributive trades readings are all due this morning whilst US consumer confidence will help shape the closing hour of trade too. Earnings news is also looking busy with BP, Reckitt Benckiser, Premier Foods, Lloyds Banking Group, ARM Holdings and Imperial Tobacco amongst the higher profile names reporting today.
Ahead of the open we’re calling the FTSE down 15 at 5739, the DAX down 8 at 6324 and the CAC down 11 at 3986.
