Factors That Will Shape The Markets The Next Quarter

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Quarter Direction Image

Factors That Will Shape The Markets The Next Quarter!

Throughout the past several years, the market has been running with the bulls. However, there are several factors that threaten a reversal over the next quarter. These factors include…

  • This season’s earnings.
  • Economic conditions around the world.
  • The oil market.
  • Consumer spending.
  • Dollar strength.
  • Stock valuations.

Below, we’ll go over each of these in detail in order to decide if the market could be headed into bearish territory throughout the next quarter. So, let’s get right to it.

This Earnings Season Is Incredibly Important

Earnings are always important to investors. However, this season is different. This is the first season in quite a while that analysts are expecting overall declines in earnings in quite some time. Citing issues like low consumer spending in the period, the dollar’s strength, low oil prices and economic conditions around the world (all of which we will talk about later on), analysts are expecting the S&P 500 to experience a decline in earnings of 3% to 4.5%. It’s also important to remember that analysts have been wrong in the past. With that said, if earnings do decline as expected, we will likely see big declines in valuations. Adversely, on the off chance that this earnings season is positive overall, it could be just what investors need to keep the bull market in full swing.

Economic Conditions Around The World

Economic conditions around the world haven’t been as good through the beginning of 2015 as they have been over the past several years. As a matter of fact, there are quite a few major economic events unfolding around the world at the moment…

The Oil Market Is Also An Area Of Major Concern

Oil has been a major discussion in the finance space for quite some time now; and for good reason. The energy sector makes up a decent portion of the S&P 500 and will likely cause declines there. Also, oil is integral to several economies around the world; including the United States economy. However, a major supply glut caused the value of the commodity to decline dramatically toward the end of 2014 and has kept prices relatively low since. Now, there’s a new development pushing more oil on the market; which will cause further supply issues.

Earlier this week, the United States reached an unprecedented nuclear deal with Iran; one of the largest oil producers in the world. For nearly the past 2 years, Iranian oil hasn’t been able to reach the market as a result of sanctions. However, as a result of the nuclear deal, sanctions are likely to be lifted; giving 1 million barrels per day of oil their pass to reach the market. Considering that the world already produces 2 million barrels more per day than it uses; this is likely to exacerbate an already big issue and cause massive declines in oil yet again.

oil market

Consumer Spending Provides A Glimmer Of Hope

Consumer spending was a major area for concern earlier this year; however, there seems to be a bit of a glimmer of hope in the area at the moment. June consumer spending figures came in showing that there was a decline of 0.3% month over month. However, even with the current decline, the annual rate of growth in the figure is 2.6%; above the average of 2.3%. However, economists do state that spending could be growing at a much more rapid pace. Here’s what JPMorgan’s Chief US Economist SD had to say about the report…

“Consumer fundamentals still appear pretty favorable, particularly the vigorous gains in job creation, but household caution still appears to be holding back a more rapid pace of spending growth…”

So, while the fact that consumer spending growth is above average could be cause for hope, the lower than possible growth rate is still a cause for concern.

Strength Of The US Dollar

Another major issue that could weigh heavy on earnings this season and the market over the next quarter is the strong United States dollar. While experts expected to see growth, they didn’t expect growth in the dollar to last for so long. At first glance, a strong dollar may seem to be a great thing. However, when we look at the bigger picture, it proves to be a dangerous problem.

With economic conditions around the world deteriorating steadily, the values of currencies around the world are declining. However, the value of the dollar is remaining strong. As a result, if consumers in other countries want to purchase American goods, they will have to pay more money to do so. This has put quite a bit of strain on US exports and is expected to continue to do so.

Stock Valuations

Finally, stock valuations may just be the nail in the coffin for strong market movement over the next quarter. The reality is that investors are investing for growth; and with valuations at nearly 17 times earnings at the moment, it simply doesn’t make sense to expect much more growth. As a matter of fact, high valuations are already starting to weigh heavy on the market.

Final Thoughts

In my humble opinion, things don’t look good for the bull market this quarter. The major deciding factor is going to be earnings. If earnings come in as expected, valuations will prove to be too much in conjunction with the other major issues surrounding the market and I would expect to see a decline. Nonetheless, any one of the factors above could prove to make a major difference in what we can expect from the market. So, watch them closely as they will help to predict future price movements.

What Do You Think?

Where do you think US markets are headed this quarter and why? Let us know in the comments below!