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Interview with CFRA’s Lindsey Bell: What to Make of Lackluster Earnings Growth, Fed’s Dovish Tone and More

The S&P 500 has broken out of a key resistance range. Can fundamentals support a significant move higher? spoke with Lindsey Bell, Investment Strategist with CFRA Research, to get her thoughts on the Fed’s first policy meeting for 2019, and the potential implications the more dovish approach could have for the market going forward. She also discussed the latest developments on earnings season, and expectations for the rest of the year.

EQ: The first FOMC meeting of the year concluded Wednesday, and language from the Fed’s statement showed an emphasis on patience with regards to future rate hikes. How does this set the tone for the rest of the year?

Bell: I think this is exactly what the market was expecting from the Fed statement. They weren’t expecting any increases in interest rates. Also, the tone of the messaging changed to really highlight the Fed’s flexibility and being dependent on data.

I think that was definitely a positive because we heard more of a dovish tone from the central bank, which is why the market shot up right after the release of the statement. The market was pricing in no change to interest rates in 2019 ahead of the FOMC meeting and the meeting statement and Powell’s commentary seemingly confirmed that thinking.

EQ: One of the key things for this year that’s different from previous years is more frequent press conferences held after these meetings as opposed to the quarterly schedule from before. Is this a good development for the market or could it potentially create more volatility going forward?

Bell: I think it could create more volatility for the market. If you take a look at what happened in 2018 after each of Fed Chairman Jerome Powell’s press conferences, you saw significant volatility in the market. More often than not, it was to the downside. However, I think now that he’s a year into this position, hopefully he’ll have a better grip on how to address the press as well as market expectations.

It is a big a change and the idea is to create more transparency for the market. I think the market will be appreciative, but it may lead to more volatility.

EQ: As you mentioned, the market seemed to respond quite favorably to the Fed’s statement. After surging off the Dec. 24 low, the S&P 500 has been bumping up against the 2,674-resistance level identified by i10Research. It closed above that level on Wednesday. How crucial is holding this level from a technical perspective?

Bell: Yes, 2,674 is a key level of resistance. We’ve seen the market kind of maintain in this range of 2,629 to 2,674 that i10Research has identified. Now that we’re above that level, the key is going to be for the market to stay above this level for a period of time, which will shift the bias to more of a rotational sentiment for the market.

That’s definitely a positive, but if we should see the market turn and take a little bit of a nosedive—potentially because of missed earnings or other market events—you want to watch the 2,629 level at the low-end of the resistance range. If we fall below that, then the bears are going to take hold.

EQ: Looking at earnings season, expectations heading into the reporting period had set a pretty low bar to clear. While it’s still early, some big names have already reported. How have the results thus far stacked up against expectations?

Bell: The way I’d describe the earnings period so far is, it’s okay. It’s average at best. As mentioned, the numbers had come down significantly going into the reporting period. So far, Q4 is looking for 12.9% earnings growth for the S&P 500, which is ahead of the 12.1% growth consensus estimates stood at on Jan. 11, which was at the beginning of the earnings reporting period. So, we’re moving higher, which is normal. Usually, in any given earnings period you see that growth rate end up 350 to 450 basis points better than the initial estimates.

It’s still kind of early days, so we haven’t seen that growth rate improve significantly yet. We’ll see what happens over the next week or so, but I don’t think we’re going to have a better-than-average beat rate this quarter.

EQ: While an earnings slowdown had been expected for 2019, estimates have come down even further to 4.1% currently for the full year. Are there any concerns that an earnings recession could be on the radar this year?

Bell: If you look at the quarterly earnings growth rate, Q1 2019 has come down quite substantially. The market is currently looking for 1.0% growth, but at the beginning of December, the market was looking for 6.5% for the quarter. So, that’s come down quite substantially and we’re not even a month into the first quarter. We’ve seen these numbers come down very sharply on the back of lower guidance as well as global growth concerns and a strong dollar.

However, I think that the numbers might be coming down a little too sharply, and the reasoning is because we at CFRA are not expecting a recession to occur in 2019. We think that GDP growth at the 2-2.5% range for 2019 is still doable. So, all that being said, we think that 1.5% growth in earnings for the first quarter might be due to too significant of a cut.

EQ: Is there any scenario in which you see this trend of estimate reductions for 2019 actually reversing?

Bell: I can’t say that we see any of the sector numbers moving higher, but I will say that there are a couple sectors where we haven’t seen numbers move significantly. Financials, Industrials, and Health Care have been the three stalwarts that have maintained 2019 growth expectations since the start of December. They’ve held pretty steady.

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