The S&P 500 Index returned -1.15% this week, the worst weekly loss since early February. The S&P 500 Volatility Index soared over 17% as equity prices fell and volatility grew. The probability of a rate hike in April fell to 0%, according to Bloomberg, after Fed Chair Janet Yellen stated that the pace of future interest rate hikes would be gradual. In fact, the first time Bloomberg projects odds of a rate hike above 50% is now in February 2017. The S&P 500 Banking Index fell -3.5% for the week as interest rates continued to fall, which impacts bank profitability.
This week also brought renewed concern about the regulatory environment and consistency in application of the rule of law in the marketplace, an echo of similar concerns post-financial crisis in 2008 and 2009. On Wednesday, the combination of healthcare sector notables Pfizer and Allergan was officially terminated. New rules were announced by Treasury Secretary Jack Lew that would make it harder for companies like Pfizer to be acquired by Allergan, with the largest benefit being a tax-motivated move to Ireland. Pfizer CEO Ian Read defended the company’s planned merger in an op-ed piece that ended with him saying: “If the new rules can be changed arbitrarily and applied retroactively, how can any U.S. company engage in long-term investment planning necessary to compete? The new ‘rules’ show that there are no set of rules.” As a result of the termination, Pfizer’s shares jumped 2% and Allergan’s shares fell nearly 15%.
Furthering the regulatory hit parade, Halliburton Co. saw its shares climb over 6% and Baker Hughes Inc. rallied over 8% on news that U.S. antitrust officials sued to halt the merger of the two companies. The official explanation was that the potential combination threatens competition and thus should be blocked. Finally, The Gap fell -18% on news that its comparable sales fell 6% year-over-year in March, with put a damper on the broader retail sector.
This writer is currently in St. Louis visiting family and planning to attend Opening Day festivities later in the day with enthusiastic Cardinals fans, assuming the rain lets up. Meanwhile, Opening Day for Q1 earnings season throws out the first pitch this afternoon when aluminum giant Alcoa (symbol AA) reports following the closing bell. Estimate revisions have been coming down this quarter for the firm, and the consensus is that AA will bring in $0.02 per share. The estimate was twice that amount two months ago.
Alcoa’s story is typical of what the S&P 500 in general is nervously anticipating for Q1 results. At the moment, Q1 is on pace for slightly negative earnings growth, continuing an underwhelming earnings picture we have been highlighting for some time now. While this may simply be more of the “underpromise, overdeliver” earnings report charade that has been in place for years now (and Alcoa has managed to easily outperform expectations over the past few quarters), it seems to us that companies in general are setting the earnings bar rather low. Based on current market valuations, that will have to change if equities are to avoid further downside.