Market Preview: Not Much 'Margin' for Error
Updated from 8:07 p.m. ET to include information on Disney's disclosure that it expects to record a $200 million loss related the 'John Carter' movie.
NEW YORK ( TheStreet) -- Monday was a pretty standard session for the broad market in 2012. Stocks went up a little, volume was nondescript, and Apple(AAPL) made big news, sending its shares to yet another all-time high.
Par for the course, right?
With the major U.S. equity indices already all up significantly from the October lows without any real pause, trepidation has fallen out of fashion to some extent but it pays to at least consider the factors that could trigger a round of profit-taking. Having already pointed out that this upcoming earnings season is going to be real test, given how little growth is expected, here's another tidbit to consider, courtesy Citigroup market strategist Tobias Levkovich, who noted the downside of the improving employment picture in commentary on Monday.
"Critically, labor accounts for better than 60% of corporate cost and an improving job trend will bite into margins as workforce expenses are inversely related to corporate profits," he wrote. "And markets do trade off of margins, though the fear of peak margins appears priced in to some extent. Investors have been worried for a good while about corporate profit margins, yet they have liked the IT sector best for several years even as that area has soared above prior peaks with respect to margins. Conversely they have not liked Utilities or Telecom Services much and margins in these two sectors are well below prior peaks."
Since the financial crisis hit, the surviving companies have pared back their workforces in response to the uncertain business environment. The extreme conditions made growing margins of paramount importance because the topline growth just wasn't there in many industries. Efficiency is what drove earnings growth in 2011 (for the most part).
Now, while the employment data has finally started to show meaningful improvement over the past few months, it's still early stages. When companies do start hiring to expand again, their costs are going to ramp up ahead of any profits they expect to be able to glean from aforementioned expansion, and Wall Street will be watching.
Earnings estimates for the S&P 500 are projecting just 2.8% growth from a year ago in the first quarter, down from an expectation for growth above 10% in early October, according to Thomson Reuters . That low view likely accounts for some increased hiring but (forgive the pun), a market that's up 25%-plus in the past six months or so won't have much margin for error.
Not to worry though. Levkovich also points out that the economic data may have gotten ahead of itself because of Old Man Winter took this year off.