U.S. companies expect lower earnings

U.S. corporate earnings have been positive this year, but investors should be cautious.

That’s because some major companies are lowering their earnings expectations, says Andrew Kronschnabel, portfolio manager at Logan Circle Partners in Philadelphia. He manages the Renaissance U.S. Dollar Corporate Bond Fund.

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In fact, he and his team have been keeping a close eye on the market since they’re “getting a bit concerned around the edges. We’re seeing [many] companies reducing their forward guidance” for the rest of the year.

There’s no reason to be concerned about fixed income, says Kronschnabel, but there’s been a bit of a sell-off in equities, which he finds has been driven by the belief that companies will be earning less throughout the year.

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However, projected earnings reductions don’t necessarily mean companies will lose revenue, he adds. Corporations are likely trying to set the expectations of analysts.

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U.S. growth expectations

The U.S economy is expected to expand by 2.5% to 3% in 2014, says Kronschnabel.

Despite December’s disappointing economic data, he finds current employment numbers are mostly positive. Further, housing is on the upswing, with more than 60% of new home purchases being funded with cash rather than debt financing.

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And though the Federal Reserve will continue to taper, the central bank’s stance is still accommodative, says Kronschnabel. December’s $10-billion reduction in asset purchases may have caught markets by surprise, but January also saw a $10-billion cut to QE.

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As such, investors will expect similar cuts to come out of future meetings; half of the QE cuts are from mortgage-backed securities and the other half are from Treasury securities.

Kronschnabel suggests the Fed has also adequately explained how asset purchase reductions are separate from interest rate movements. Even as QE winds down, the U.S. market will be confident that “rate[s] won’t move up for quite some time.”

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Further, the overall the market has been well behaved in response to tapering he adds. That’s in contrast to what happened last spring, “when [it] was very spooked and reacted quite violently to the prospect of tapering.”

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