Once again, we are seeing the usual hand-wringing over the fact that after a 17 percent rally from the December low, some of the stock market's sector leaders are meeting resistance.
Leadership groups like semiconductors, the Russell 2000, banks and industrials have been weaker in the last couple weeks and with good reason. The markets are no longer cheap. Since Feb. 24, the S&P 500 is down 1.5 percent. In the same period, semiconductors are down 2.7 percent, the Russell 2000 has slipped 3.9 percent, banks are down 4 percent and industrial stocks have shed 2.6 percent.
The key to getting markets moving again is to stop the decline in earnings estimates. There are signs that is happening.
On Jan. 1, first quarter earnings were expected to be up 5.3 percent, but that forecast collapsed over the next six weeks. In early February, the revised forecast was looking for earnings to be up 0.7 percent, and later that slipped to an estimate calling for earnings to be down 0.5 percent. As of today, the estimate is calling for earnings to be down 1.3 percent. So, the rate of decline is slowing and it is likely earnings will end up positive for the first quarter.
That's because corporations typically provide conservative guidance and beat estimates by a roughly 3-percentage-point margin. If the estimates are calling for earnings to be down 1.3 percent right now, and if they stay in this range, it's likely earnings will be up somewhere in the 1 percent range.