As of Friday morning, the economic data is as good as we could expect given the current backdrop.
Employers added 157,000 jobs last month following a slightly revised 80,000 rise in April. Unemployment held steady at 4.5%. Personal income dipped fractionally in April, but spending rose. More importantly, personal consumption expenditures [PCE], a key figure for the Fed, rose just 0.3%. This puts the year-over-year increase at 2%; the Fed’s perceived preferred range is 1% to 2%. The ISM’s May manufacturing index improved to 55 (signaling expansion), but the rate of price increases slowed. Consumer confidence dipped a little, but not enough to cause worries according to the University of Michigan. The National Association of Realtors’ index of pending home resales fell to its lowest level since 2003.
So what does this all mean? The Fed is not going to make any changes to interest rates. The economy is expanding, but has areas of weakness. Inflation is a bit uncomfortable, but not high enough to cause problems. Not surprisingly, yields on the 10-year treasury are falling and stocks prices are higher. We’re not seeing an all out rally in stocks, possibly because the data is within the range of expectations. The record high in short interest could also be playing a role with some traders waiting to for the intraday record high of 1,552.87 to broken. (In other words, it is possible that some of the traders who are short believe a pullback will occur before the broad-based index takes out its intraday record.) I had expected a stronger upward move, but the market’s propensity for randomness is causing cracks in my crystal ball.
The calendar will not provide many catalysts to move stocks in either direction over the next seven days. Just 47 companies are scheduled to report during the week of June 4 – 8, including S&P 500 members ADC Telecom (ADCT) and National Semiconductor (NYSE:NSM). On the economic front, there will be April factory orders (Monday), ISM services index (Tuesday), revised first-quarter productivity (Wednesday), April wholesale trade and consumer credit (Thursday) and the April trade deficit (Friday).
Volume levels could be lighter than normal as traders and portfolio managers start taking summer vacations. The number of earnings estimate revisions will continue to decline. Merger activity could provide a boost, though it will depend on the companies involved. Primarily, however, market direction will determined by sentiment and with the S&P 500 in record territory, the sentiment is bullish.
Companies That Could Issue Positive Earnings Surprises during the Week of June 4 – June 8
One brokerage analyst recently raised his fiscal second-quarter forecast on ADC Telecom (ADCT). The analyst expects ADCT to report profits of 25 cents per share, two cents above the consensus forecast of 23 cents per share. ADCT has topped expectations three out of the past four quarters, though its fiscal fourth-quarter earnings were a penny below forecasts. ADC Telecom is scheduled to report on Wednesday, June 6, after the close of trading.
Companies That Could Issue Negative Earnings Surprises during the Week of June 4 – June 8
Over the past 30 days, brokerage analysts have lowered their expectations for Credence Systems (CMOS). The consensus estimate calls for breakeven second-quarter results compared to the month-old forecast for a profit of a penny per share. CMOS missed expectations last quarter by a margin of seven cents per share. Credence Systems is scheduled to report on Monday, June 4, after the close of trading.
Late in the day, last Tuesday afternoon, Smithfield Foods (NYSE:SFD) preannounced fiscal fourth-quarter earnings. The company expects to report profits of 30 to 35 cents per share. The company cited higher costs in its hog production operations and losses in its cattle feeding business. The warning is in contrast to what has been good earnings news from other meat producers, but SFD has missed analyst forecasts during two out of the past three quarters. Several brokerage analysts slashed their forecasts last Wednesday and Thursday in response to the warning, causing the quarterly consensus estimate to fall by 10 cents to 33 cents per share. Smithfield Foods is scheduled to report this Thursday, June 7.
CMOS, SFD, ADCT 1-yr chart: