Apple crushes forecasts? said one headline. ?Intel blows past estimates? read another. Indeed, corporate earnings this season in the US have sprung more than a surprise, with IBM, Intel, Qualcomm, Apple, Citigroup, Morgan Stanley and General Electric all putting out numbers that have prompted quick upgrades. Analysts now estimate blended quarterly earnings growth for the March quarter could come in at 15.5%; The Street reports this percentage is up from an expectation of 13% growth on April 1, reflecting how well the numbers have come, insofar as 75% of the companies reporting have topped the average analysts? view to date. It goes on to add that ?the bullishness is also raising the bar for the second quarter as Wall Street now sees growth of 14.7% for the June ending period vs 13.3% as of April 1.? True, not all firms have lived up to expectations?Kimberly-Clark disappointed, as did AMD and a bunch of other not-up-to-the-mark performances, together with concerns on rising costs, may have cut short the earnings rally. But then, that?s typical of earnings rallies that often tend to peter out by the second half of the month, once the good news starts to get priced in. Nevertheless, the S&P 500 is still up there at 1,335 after a remarkable rally that began sometime in July last year, dishing out a mouthwatering 30% since then and still up 6% year-to-date.

But with Brent spiking to $125 a barrel, oil supplies from OPEC not coming in as anticipated, sovereign debt problems in the Eurozone, the aftermath of the earthquake in Japan and turmoil in the Middle East, the headwinds are many. JP Morgan observes that world growth is not impressive and is too mediocre to fix many of the balance sheet problems of the household and public sector in developed markets anytime soon. However, as it points out, ?… it is strong enough to allow corporates and emerging economies to flourish.? That is reassuring because investors are a tad anxious about the GDP growth estimates that will come in on April 28; consensus estimates peg growth for the January-March quarter at a tad under 2% annualised. There has been some weakness in the US economy in the March quarter, thanks to higher oil prices, but the second quarter could be better. Global growth estimates for the second quarter have been pared largely because of disruptions in Japan, the impact of which is yet to be fully felt in global manufacturing. Again, the rebuilding of Japan later in the year could well push up growth. Therefore, with a soft landing in China now much more of a probability after a series of rate tightening measures, and the prospects for growth in emerging economies clearly more promising than in the developed markets, it?s not surprising that fund managers globally are upping weightages in favour of the emerging economies. While some of the Asian economies have been hurt by the events in Japan, its rebuilding should be a stimulus.

The US markets are also somewhat tentative ahead of the Fed?s two-day meeting that kicked off on Tuesday. Of course, the big question is what happens when QE2 ends; after all, it?s a fact that markets everywhere have been driven up by liquidity even if the rally, this time around, was not led by the BRIC nations as it was in the case of QE1 (except for China). In fact, markets such as India underperformed after QE2, in part because the growth outlook for economies such as the US were improving and valuations were far more attractive; in October, the Indian market was trading at forward multiples of nearly 17 times. If there is no QE3, markets like India?s will go back to looking at corporate earnings and inflation and, should interest rates move up for some more time, money could flow out of equities before valuations become compelling again. The good news could come from a drop in the prices of commodities, especially crude oil, which would make markets such as India tremendously attractive, given that corporate bottom lines seem to be holding up pretty well even under severe input cost pressures.

Bank of America Merrill Lynch believes that, much like it happened after QE1, markets could correct for about three months, with both developed markets and emerging markets giving up some of their gains. Should there be no QE3, the dollar could well strengthen and that may not go down well with the markets; indeed, the correlation between Asian equities and a rising dollar has, more often than not, tended to be negative. Markets typically don?t do much in the initial stages of an interest rate tightening cycle but gradually take it in their stride and get it over with before the year is out. Right now, there seems to be ample liquidity in Asia?the growth rate of money supply minus the growth rate of industrial production, Citigroup estimates, continues to improve. Also, ever since fund managers reversed their stance on the emerging markets, money has moved into these markets; the week to April 20, for instance, saw the fourth consecutive of inflows into emerging markets and, going by past trends, one could expect flows to continue for a few more weeks as fund managers continue to add to their emerging market exposure. An end to the stimulus by the Fed would indicate that the US is confident of a recovery; that would be good for the world economy and for India. There may be less money sloshing around but there would be more growth to drive up the market.

shobhana.subramanian@expressindia.com