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Market Lab Report - Premarket Pulse 5/27/16

Major averages trading in a fairly tight trading range then finished near flat on lower volume. The tight trading range can be seen as constructive as the market digests sharp gains over the last few days. Fed Chair Janet Yellen is scheduled to speak at 1:15 p.m. Eastern time today, which has the potential to move markets. Otherwise, trade is likely to quiet down ahead of a long Memorial Day holiday weekend.

S&P 500 earnings fell in the first quarter at their fastest rate since the third quarter of 2009. S&P 500 earnings have been declining sharply since early 2015. S&P 500 earnings also declined at a similar rate between early 2001 and early 2002, as well as between early 2008 and mid-2009. Both periods marked steep declines in the major averages, though QE put a floor in falling markets in early 2009.

Will falling earnings drag down markets once again? The difference between now and the prior two periods is QE which creates shallow floors and pushes markets higher, albeit more and more unwillingly with each passing month. Thus while markets could overcome falling S&P 500 earnings, it is yet another headwind with which they must contend.

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