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Increased Mergers and Acquistions Help, But Headwinds Persist

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Nov. 20 2020, Updated 5:11 p.m. ET

Increased mergers-and-acquisitions activity helped support the stock rally despite the fact that the U.S. earnings season continues to be a bit of a disappointment. Although earnings per share (or EPS) growth through January 30 is tracking a bit better than forecast, EPS estimates for the first and second quarters have declined from December projections.

Market Realist – Increased M&A (mergers and acquisitions) activity in the past couple of weeks has supported US equity markets (SPY). Pfizer (PFE) has agreed to buy out Hospira (HSP) for a cool $17 billion, making it the top M&A deal for the year so far. Staples (SPLS) is set to acquire Office Depot (ODP) for $6.3 billion. 2014 has been a record breaking year for M&A activity and 2015 is set to carry the increased M&A momentum forward. The increased M&A activity will be propelled by the strong dollar (UUP) and falling energy prices (XLE). Healthcare (XLV) and technology (XLK) are likely to benefit the most with strong demographic and secular trends and aging technology providing impetus. Increased M&A activity is likely to be a tailwind for stocks this year.

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Market Realist – The rally for the past couple of weeks has come despite the slightly disappointing earnings season. Growth in blended earnings has been pegged at 3.1% by FactSet, which is a modest improvement over the forecast. 77% of the 391 companies that have reported earnings for 4Q14 have exceeded mean estimates as the above graph shows. 58% of the 391 companies have reported revenues above the mean estimate as the below graph shows.

Market Realist – However, according to FactSet, EPS growth estimates have dropped to -3.6% and -0.7%, respectively, for 1Q15 and 2Q15 from the 4.1% and 5.3% projected estimates in December. Most of the lowered growth rates can be attributed to lower earnings forecasts for the energy sector. A decline in earnings is likely to prove to be a headwind for stocks going forward.

Read on to the next part of the series to understand other factors that can act as headwinds for US equities in the future.

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