If you talk to most stock investors, you will almost certainly hear that 2014 was a stellar year for the market. Both the S&P 500 and the Dow Jones Industrial average traded at consistent records with very little to be seen in the way or corrective pullbacks. These gains were seen as US economic data continued to improve and corporate earnings levels built on the progress that was made during the previous year.
But with stocks trading at all-time highs, new investors might be concerned about buying into the market at its current levels. These are valid concerns, and the answer to whether or not 2015 will be a bullish year will depend heavily on the strengths or weaknesses that are seen in corporate earnings. Here, we look at some of the factors to watch as companies report their next set of quarterly revenues.
When we look at the consensus expectations from the stock market analyst community, we are starting to see a slowdown in the bullish optimism that marked 2014. In terms of earnings growth, US companies are now expected to show gains of 5.3% for the first quarter and then come in slightly higher at 5.9% for the second quarter. For the last several years, we have seen consistent outperformance in corporate earnings relatively to the initial expectations. But trends these strong cannot last forever, and it is starting to look much more probable that 2015 will see a more pronounced slowdown.
The Fed Factor
Part of the reasoning behind these declining expectations is the fact that the US Federal Reserve is widely expected to start raising interest rates in the near future. Some members of the analyst community have suggested that interest rates could be as high as 5% by the end of 2015, and this is not a positive scenario for stocks as a whole. Higher lending rates tend to weigh heavily on consumer spending practices, and this makes it much more difficult for companies to pad their bottom lines.
So a good deal of whether or not these pessimistic forecasts come to fruition will depend on the Fed itself, and whether or not they decide to increase interest rates in an aggressive manner. For these reasons, dates where central bank meetings are scheduled will likely be much more volatile in 2015 than they were in 2014. If you are trading in these markets with a more conservative outlook, it will probably be best to stay on the sidelines until these meetings have reached their conclusion as this will help you to avoid wide fluctuations in market price when entering into new positions.
Potential Positives: Valuations In-Line With Historical Averages
On the positive side, we can still see that US stocks are trading at valuations that are roughly in-line with their historical averages. Looking at the history of the S&P 500, stocks tend to trade at a price-to-earnings (P/E) ratio of about 15.9. Currently, stocks are trading only slightly higher at a P/E ratio of 17, so there is no real reason to believe that we will be seeing any significant declines in the main benchmarks any time soon. If stock valuations hold relatively steady and we do see at least some growth posted during the next earnings season, the combined forces will bring stocks closer to their historical P/E averages. This would show that stocks are priced appropriately and that there is little reason to start exiting positions in equities.
Overall, the first earnings season of 2015 will be characterized by a balance between the expectations and the final results. If we see upside surprises in blue-chip names (particularly in tech stocks and in energy), we should see a steady rally in benchmarks like the Dow Jones Industrials and the S&P 500. Will the performances seen equal what was witnessed during the previous year? This is unlikely, especially if we start to see the Federal Reserve take a more aggressive stance in its policy to normalize interest rates. In any case, first quarter earnings for 2015 will likely set the stage for what is to come — and investors will need to position themselves accordingly.