As we near the mid-point of May 2015, we finally wrap up the peak of earnings season and the conclusion of the first major measurement for the first quarter of 2015 (Q1-2015). It was obvious going into the season that two major factors would drag down earnings across all sectors: lower oil prices and influences from a stronger U.S. dollar. It resulted into selloffs across much of the market. However, if the Street knew what was coming, why was the reaction so harsh?

The answer was more apparent in the recent dismal preliminary reading of the U.S. gross domestic product growth in Q1 (+0.2%) which ironically enough was the same as the headline growth for all U.S. earnings. As it turns out, it showed hardly any underlying growth at all. Deutsche Bank’s economic strategists noted that while there was weakness in earnings in the U.S., the growth in Europe (+16.8%) and Japan (+16.5%) was incredibly robust, driven by margin expansion. Ultimately, the effects of oil and currency translations masked the real underlying growth in the U.S. economy – it was actually just slightly weaker than the rest of the world.

Analysts looked at what overall earnings growth in the S&P 500 would have looked like if all earnings were adjusted for the impact of oil and currency exchanges. According to Deutsche Bank’s analysis, the oil price swing cut a whopping 7.2 percentage points from earnings growth and the stronger dollar hacked an additional 4.3 percentage points. The end result is the following…

• Europe +15.4% (unadjusted +16.8%)
• Japan +16.4% (unadjusted +16.5%)
• US +11.7% (unadjusted +0.2%)

Yup…while the market was freaking out in reaction to earnings, there was a strong underlying growth all along. Just imagine what second quarter-2015 (Q2-2015) will bring!

Today’s Session

We had two important domestic data reports released this morning that have the ability to sway the market during today’s session. Firstly, the Bureau of Labor Statistics (BLS) reported that the Producer Price Index (PPI) for the month of April declined by 0.4% month-over-month when consensus called for a gain of 0.2% which would have been the same reading as March. At the wholesale level, prices remain rather low, but economists are looking for the upward shift in oil prices to translate to higher product prices in the coming months. The US Department of Labor also reported that for the week ended May 9^th jobless claims fell slightly, coming in at 264,000 after coming in at 265,000 the prior week, marking the third consecutive week in which claims came in under 270,000. We will have more details on both reports in the afternoon note.