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Investors sent stocks lower early in the week as they grappled with revenue growth problems in first quarter earnings reports. Nearly three-quarters of the S&P 500 companies that have reported earnings so far have beat profit expectations, but fewer than half of those companies have exceeded revenue expectations.2 These results mean that firms are overcoming weak demand by carefully managing their expenses. Even so, cost cutting has its limits if sales don’t eventually pick up.
However, earnings season is still young, and several big-name U.S. firms are scheduled to report this week. Once firms such as Morgan Stanley [MS], Amazon [AMZN], Boeing [BA], and General Motors [GM] release their data, investors may have a better view into whether markets will snap back from last week’s fall.
This week, investors are looking forward to a heavy flood of earnings reports as first-quarter earnings season kicks into high gear. Though it’s too early to predict overall earnings, the tough growth picture – largely due to headwinds from the strong U.S. dollar, weak overseas growth, and low oil prices – may make it hard for companies to beat their revenue expectations.
Beyond Our Borders
U.S. investors got nervous last week when fears that Greece will exit the euro (the so-called Grexit) rose again after negotiations faltered between Greek leaders and creditors. A Greek exit from the euro would likely have serious consequences for the rest of the Eurozone. Both sides must come to an agreement soon if Greece is to avoid defaulting next month on loans. In response to the tension, bond yields on Greek debt rose and European stocks suffered their biggest fall since the middle of January.3,4
Meanwhile, new stock trading rules in China sparked more investor concerns. Chinese regulators introduced new rules banning some kinds of high-margin trading. Higher margins put traders at risk of greater losses if stock markets drop. China wants to protect an equity market that may be overheating and an expanding economy that may be cooling off.5
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