Photographer: Michael Nagle/Bloomberg

Worst Week in Two Months Rattles Equity Bulls as Earnings Loom

  • S&P 500 almost erases gain for 2016 as volatility returns
  • Corporate profit forecast to drop 10 percent in first quarter

It’s official -- the rally in U.S. stocks that erased the worst-ever start to a year has fizzled, with the biggest weekly slide since February depriving the bull market of momentum ahead of what’s forecast to be the steepest earnings slump since the financial crisis.

The Standard & Poor’s 500 Index fell 1.2 percent in the five days to 2,047.60, the second slide in the three weeks since the gauge erased an 11 percent loss for the year. The period was tumultuous, with the average daily swing of 0.8 percent the most in a month, while three days of 1 percent moves ended a 15-day stretch of calm, the longest since March 2015. The Chicago Board Options Exchange Volatility Index capped its biggest weekly advance since January.

The return of volatility belies a three-week stretch that’s left the U.S. equity benchmark virtually unchanged as optimism in central bank support battles concern that the efforts won’t jumpstart growth. With the seven-year bull market weeks away from becoming the second-longest in history, reasons for additional gains have grown thin, as valuations remain elevated and U.S. stimulus winds down. Now equity bulls have to contend with first-quarter profits forecast to fall 10 percent.

“Earnings are coming up and markets will change from macro to domestic, earnings-specific issues,” Anwiti Bahuguna, senior portfolio manager at Columbia Threadneedle Investments, said by phone. “If you look back on the last month the S&P hasn’t gone anywhere. The speed of the rally did worry us because it happened so fast that there could be some profit-taking continuing for a couple weeks.”

Stocks opened the year with the biggest rout on record over the first six weeks, before central-bank assurances sparked a rebound not seen since 1933. Yet after the latest week’s slide, the S&P 500 is now up just 0.2 percent for the year, and the gauge hasn’t strayed more than 1 percent from 2,050 in three weeks.  

Now attention turns to corporate profits, with Alcoa Inc. the first major company to report first-quarter results starting April 11. Analysts forecast earnings in the quarter will decline for a fourth straight quarter, according to data compiled by Bloomberg.

“The market is indicating the central-bank driven rally is running out of steam,” Aaron Waxman, principal at Bingham Osborn & Scarborough LLC in San Francisco, said by phone. The firm manages $3.5 billion. “We may get earnings surprises but that’s in the broader context of higher prices. It’s just hard to push up stocks in a meaningful way at this point.”

Swings in the market aligned with a 17 percent jump in the the CBOE volatility gauge, the biggest weekly advance since Jan. 8. The measure of market turbulence known as the VIX closed the prior week at the lowest since August.

The rally off the February trough has made bargains in the stock market harder to find. The S&P 500 currently trades at 18.6 times trailing 12-month earnings, near the highest since November and 12 percent above the 10-year average.

“Earnings are expected to be down, yet stocks have run up to 18, 19 times earnings here given this rally,” Phil Orlando, who helps oversee $360 billion as chief equity-market strategist at Federated Investors Inc., said in an interview with Bloomberg TV. “We’re probably going to see a little bit of a pause, a little bit of a correction as the market digests disappointing GDP numbers, disappointing first-quarter corporate results.”

Eight of the 10 main S&P 500 groups retreated in the week, with bank shares leading with a 2.9 percent slide. Much of the damage in lenders was done Thursday, as new rules issued by the government on financial advising weighed on the sector. Losses in Bank of America Corp. and JPMorgan Chase & Co., both of which declined more than 3.5 percent in the week, led a selloff in bank stocks that day that was the biggest since February.

The three most expensive industries in the stock market had the best week. Energy and health-care stocks, which trade at price to earnings ratios of 28 and 21, respectively, were the only two groups to advance. Consumer staples stocks, with a valuation of 23 times earnings, slid 0.5 percent.

Equities didn’t get any help from 2016’s biggest winners in the week. Shares of utilities and phone companies, both of which had added more than 14 percent through April 1, lost at least 1.9 percent.

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