The consensus is that corporate earnings will again be strong for the second quarter, but we will all be watching the guidance each company issues for future earnings. What we have seen over the past few weeks is a downturn in global macro data leading to the markets pricing in an increased aversion to risk. That's market-speak for investors worrying that stocks have become too risky in an environment of slowing or stalling economic recovery. That means that these next weeks will set the tone for the markets through the summer.
Given our current view that we are slowing but not enough to double dip, we will be watching for the following: given that corporations have record cash levels and strong cash flows, will they be increasing their spending on the capex, hiring, and payouts that are needed to develop a self-sustaining recovery?; with investors skeptical about the sustainability of earnings, will companies be able to maintain margins and control costs in a lower/uncertain growth environment?; and, to what extent are policy reforms and uncertainty raising costs and causing companies to hesitate in spending money, hiring, and investing?
If there are positive answers to these questions and some positive economic news next week, we may see the markets begin a more sustainable upward trend. To that end, we will also be watching Wednesday's Retail Sales report, Thursday's Producer Price Index and Industrial Production reports, and Friday's Consumer Price Index report.