The earnings season will kick into a higher gear this week, with more than 150 S&P 500 companies due to announce actual results. If positive earnings surprises remain near 78%, this will reduce the threat of hitting an earnings recession and may, in fact, show slight growth in Earnings Per Share (EPS) for Q1.
With the S&P 500 forward PE (Price to Earnings) ratio sitting near highs of 16.8 and the Index 1.2% below its historic record, investors need convincing results to keep buying equities at their current levels. The Federal Reserve has limits on what it can do to tighten monetary policy, and loosening policy may not happen unless we see serious signs of declining inflation, which is not the case at the moment. That’s why a disappointment in results this week may lead to a sharp correction in equity prices.
Oil prices surge to new highs
Brent and WTI surged to new 2019 highs early today following reports that the White House will end waivers granted to countries importing Oil from Iran. According to a Washington Post report, Secretary of State Mike Pompeo will announce the move to end exemptions later today. While some market participants were expecting the waivers to end when they expire in early May, this was still not fully priced in.
Whether Oil prices will resume their uptrend from here on depends on OPEC’s next move, especially given the deteriorating situations in Libya and Venezuela. We expect to see increasing pressure from Trump’s administration on OPEC to pump more Oil, and that’s likely to lead OPEC+ to increase output in the second half of the year. However, we may still see an additional spike in prices before the situation becomes clear.