Overall investors continued to shift a large portion of their equity holdings from U.S. markets to international markets. In April investors withdrew $16 billion net from U.S. equity markets while setting a record with $25 billion in net positive inflows into international equities.
At the moment international markets are perceived as slightly undervalued and less risky while U.S. markets are generally considered to be fairly, if not slightly overvalued. I don’t foresee anything changing that perception, which means that everything has to go right for U.S. equities to maintain their current growth trajectory.
With about 75% of companies reporting earnings to date this quarter, 78% beat or met bottom line earnings per share estimates which is a bit above historical averages. That would be comforting, if not for the fact that only 46% of companies have met or exceeded top line sales revenue estimates. What’s more concerning is that many of these revenue targets had already been guided lowered prior to the quarter. The main culprits used by corporations for lower revenue growth included cold winter weather and the rising dollar.
While I pay attention to earnings per share, I still consider top line growth and cash flow to be as, if not more important, than earnings per share growth which is more easily manipulated through financial engineering. Stocks still remain expensive in my estimation based on my valuations. It appears the FED is also starting to take notice while setting market expectations.
“I would highlight that equity market valuations at this point generally are quite high,” Yellen said. “There are potential dangers there.”
Most market pundits expect revenue growth to rebound in the second quarter. If revenues continue to trend lower however, it will be an ominous sign leading to what could be a sharp market correction if coupled with a slight interest rate hike and stronger dollar.