The Final Four of the 2015 NCAA College Basketball Tournament are set, with Kentucky facing Wisconsin and Duke playing Michigan State this Saturday. But which “teams” are likely to win the current game of stock-market investing?
Burt White, chief investment officer for LPL Financial (LPLA) just shared his views on the market’s Final Four: the economy, earnings, valuations and technicals.
“Based on our assessment of these four factors, we expect stock market investors may be ‘cutting down the nets’ due to potential high-single-digit stock market gains in 2015,” he explained in a report issued Wednesday.
Semifinalist #1: Economy
Due to the impact of falling oil prices and the strengthening U.S. dollar, the economy has weakened in the first quarter.
“Cheap oil has led energy producers to cut spending. The strong U.S. dollar has reduced the attractiveness of U.S. exports, contributing to a slower pace of growth,” White explained.
Plus, a tough winter and a work slowdown at West Coast ports hurt economic activity. Still, U.S. gross domestic product is on track to grow 1%-2% in the first quarter of 2015, experts say.
“We expect the reversal of some of these factors should help GDP growth return to 3%-plus in the coming quarters. Better weather should be a given. Consumer spending is beginning to benefit from lower fuel prices, while transportation costs have come down,” White said.
There’s some pickup in economic activity in Europe, and China is expected to enact more stimulus measures to achieve its 7% growth target.
The bottom line, says White, is for a continuation of economic expansion in 2015 after the first-quarter dip. Furthermore, there’s little to no evidence of excesses that could suggest an impending recession.
Semifinalist #2: Earnings
Earnings growth appears to have “stalled” in early 2015, according to LPL, “but we continue to see earnings as a key driver of our positive stock market view.”
Earnings could fall 3% year over year in the first quarter, points out Thomson Reuters, as a result of the drop in oil prices and the strong U.S. dollar.
“We estimate the drag on overall S&P 500 profits from energy-sector earnings during the first quarter of 2015 to be roughly 4%-5%,” White said.
Since S&P 500 companies generate about 35%-40% of their sales overseas, there’s a strong drag on revenue earned in foreign currencies with a strong dollar. “We estimate that currency represented a roughly 3% drag on S&P 500 earnings during the fourth quarter of 2014, based on a 9% rise in the dollar during that quarter vs. the year-ago period (Q4 2013),” he added.
A 6% drag on earnings from current currency levels is “a reasonable expectation” for Q1’15, White notes.
“We expect market participants to see these two earnings drags as mostly temporary and look beyond them to better earnings growth later this year,” he said.