Investor sentiment is fragile and the stock market’s been volatile, but the trading action over the last little while has revealed one big consolidation, not a breakdown in the main stock market indices. What’s holding the market around 1,200 on the S&P 500 Index is the expectation for decent corporate earnings. From my perspective, third-quarter earnings results can’t come soon enough. Investors need to hear from corporations about their business conditions and their forecasts for the future. This is the news that can make all the cash sitting on the sidelines take action.
The broader market is very fairly priced at its current level and reduced expectations for future growth are now factored into share prices. Accordingly, I think we’re seeing a new base developing for the broader market and, unless third-quarter earnings are bad or there’s a major shock to the system (like a sovereign debt default) I think stocks can build upon this base.
Still, it’s pretty difficult to imagine a new bull market developing right now. However, I do think that the stage is being set for the resumption of an upward trend (since the March low of 2009), as earnings expectations are generally good. Eventually investors will step up to the plate to purchase earnings growth and, when there’s some good news from the economic data, we could have the makings of a solid stock market advance. When this scenario might play out is the big question. Sentiment isn’t strong enough right now. It could happen later in the fourth quarter. We might have to wait until next year. As an optimist, I’m siding with Warren Buffett’s view that the economy will get better—it’s just going to take more time.
While I’m seeing more value in this market, I do want to reiterate my view that investors don’t need to be in any rush to take on new positions in stocks. There are always good trades out there; but, generally speaking, this is a market that isn’t poised to go far at this time.
Quite consistently, corporate earnings have been very good over the last four quarters and so have corporate balance sheets. While big companies aren’t spending on new plant and equipment, or on new workers, they have been able to increase their selling prices without affecting demand. This is a good sign and it especially reflects better business conditions in the industrial, enterprise-level economy. Things are less robust at the retail, Main Street level.
One sector that Wall Street is looking for leadership in this upcoming earnings season is technology. Large technology companies disappointed so far this year, as analysts were expecting more growth from the big players. Those companies with large, retail operations—excluding Apple Inc. (NASDAQ/AAPL)—didn’t produce good enough numbers. And that’s why you have Hewlett-Packard Company (NYSE/HPQ) wanting to get out of the retail computer business.
Over the very near term, it’s continued choppy trading action. There is, however, something to be said for how well the main stock market indices are holding up.