Stocks aren't out of the woods even though earnings recession isn't happening

Traders and financial professionals work ahead of the closing bell on the floor of the New York Stock Exchange.
Johannes Eisele | AFP | Getty Images

The earnings recession is not happening. Despite disappointments from 3M, earnings for the S&P 500 are now expected to be flat for the first quarter after dire predictions in December.

Strong reports from Facebook and Microsoft and CNBC parent Comcast were the key to raising S&P 500 earnings estimates from down 2.5% two weeks ago to flat today.

S&P 500: Q1 earnings estimates:

Today: 0.0%
April 24: down 1.1%
April 22: down 1.7%
April 11: down 2.5%
Source: Refinitiv

Not out of the woods: Stocks have been rallying on the belief that the economies in China and to a lesser extent Europe have been "bottoming," but comments in the last 24 hours are reminding investors that this is not settled.

South Korea's surprise announcement that its GDP was down 0.3%, well below expectations of a gain of 0.3%, was one such warning sign. South Korea is very dependent on China for its exports.

MMM, which gets 20% of its revenue in Asia, pointed to slower growth in key markets, including China.

Semiconductor companies are particularly reliant on China for growth. The iShares Semiconductor ETF (SMH), a basket of semiconductor ETFs, is up 35% this year, largely on a belief that China has bottomed. Taiwan Semiconductor seemed to support that: A week ago, its CEO said, "We believe we may have passed the bottom of cycle of our business."

However on Wednesday, Texas Instruments contradicted that assertion, saying the weakness in chip sales may continue, and Lam Research, one of the largest semiconductor manufacturing equipment companies, said the "spending correction" in memory chips will extend through this calendar year.

"The weak South Korea GDP was driven by weak semiconductor sales, largely to China," said Brendan Ahern, CIO of Kraneshares, which has a family of China ETFs. "There are plenty of 'green shoots' in China," he said, pointing to improvements in the Chinese Purchasing Managers Index, GDP and industrial production.

But Ahern notes that the huge 25% rally in Shanghai this year, among the best of all global markets, leaves China stocks vulnerable: "We are entering earnings season for China names. We need to see all that stimulus trickle down."

And, most importantly, he notes that the China data needs to continue to improve: "The fundamentals need to catch up with the market."