Buy on Rumor and Sell on News—Anything
Can Happen This Earnings Season

 institutional investorsCorporate earnings news can’t come soon enough. The Federal Reserve brought a tailwind to the stock market at the beginning of the year and recently took it away by advocating that further monetary stimulus isn’t likely as long as the economic news gets better. Recent stock market action has not been worrisome, although expectations for first-quarter corporate earnings have been significantly reduced.

It’s anyone’s guess as to how the stock market will perform over the very near term. If corporate earnings beat expectations, the market should tick higher. But then again, institutional investors have already placed their bets. I suppose that expectations for corporate earnings over the coming quarters will have to be very positive for share prices to keep advancing. The stock market is due for a meaningful correction. Will it happen soon? Likely.

I continue to be of the view that large-cap, dividend paying stocks are the best assets to own in this kind of market, but I wouldn’t be much of a new buyer. Corporate earnings growth is better protected among large-cap, international companies. They’ve been the best play since the financial crisis three years ago and we’ve seen a lot of increased dividends payments recently. (See Another Bullish Sign: More Announcements of Increased Dividend Payments.)

A good part of my enthusiasm for dividend income is due to the fact that we are now in the age of austerity. Once all the elections are over in mature economies, both capital markets and political reality will force a lot of belt tightening. This is certainly a good thing, but it is going to have a profound effect on global economic growth. The stock market can’t really appreciate a whole lot more than the rate of corporate earnings growth, and corporate earnings can’t really accelerate more than the rate of general economic growth. We are in the age of austerity and things are going to change quite a bit starting next year. This is why I’m not very bullish on the stock market’s ability to generate capital gains going forward. It’s also why dividend income is so important if you’re an equity investor.

I think we’re going to get very good corporate earnings from the big banks and that will be helpful, because the financial sector has been a real laggard over the last few years. Expectations are lofty in large-cap technology and, if corporate earnings don’t impress, this sector is going to take a major dive. I think the industrial economy will continue to produce good numbers along with select “Main Street” sectors like retail. The stock market’s near-term trading will be all event-driven and the action is going to be choppy.