Don’t Get Caught—These Earnings
Warnings Mean Something

These Earnings Warnings Mean SomethingWe’ll see how long the Federal Reserve-induced stock market rally will last. We’ll probably see continued positive trading action right up until the third-quarter earnings season begins. I think this market will only turn on really bad economic data or new earnings warnings from corporations.

Intel Corporation (NASDAQ/INTC) was one of several big-cap companies to warn on third-quarter earnings and revenues. Intel has faced a lot of headwinds from competition with market-leader Apple Inc. (NASDAQ/AAPL), consumers’ increasing use of tablets, and very sluggish business conditions in the eurozone. I don’t think we’ll see Intel accelerating on the stock market anytime soon.

Intel Corporation Chart

Chart courtesy of

Another one of the many big-cap companies to have already warned on upcoming revenue and earnings was FedEx Corporation (NYSE/FDX). FedEx cited the same reason as Intel: a slowing global economy will affect upcoming quarterly earnings. FedEx is faring much better on the stock market than Intel, even though the company pays a much smaller dividend to shareholders.

FedEx Corporation Chart

Chart courtesy of

Just like in the economy, some businesses and industries are going to fare a lot better than others this third-quarter earnings season. When Intel revised its third-quarter earnings guidance, the entire PC sector sold off on the stock market. Within the freight and delivery industry, United Parcel Service, Inc. (NYSE/UPS), which is part of the Dow Jones Transportation Index, has been breaking down since May. The stock bounced back in July but has been in a solid downtrend ever since. It’s pretty clear that the modest economic recovery in the U.S. in not broadly based.

The main stock market averages have done well this year, but it’s still a trader’s market. The buy-and-hold investment strategy might now be a thing of the past for many positions and industries in the stock market; Intel illustrates this point perfectly. (See “Why Getting the Business Cycle Right Is the Only Thing That Pays.”)

This stock was a great trade over the last 12 months, and even Warren Buffett’s investment company recently traded the stock for a solid profit. Over the last 10 years, Intel’s share price hasn’t done a thing.

Investor sentiment on the stock market is currently buoyant, but it isn’t because the market expects robust earnings growth, and this is the problem. A Fed-induced stock market rally is unsustainable without earnings growth, and with the eurozone in recession and China’s economic growth on the decline, the U.S. stock market is now ahead of economic fundamentals.

At the end of the day, the biggest beneficiary of the Fed’s inflationary policies is the commodities sector, where a declining U.S. dollar is giving a huge boost to oil, gold, and silver prices. Investment strategy in this kind of environment is very difficult. On the one hand, you don’t want to fight the Fed; on the other hand, all the forms of monetary stimulus have created an artificial environment for investors. Where you don’t want to be is on the end of the hook when the party ends. All this market manipulation is likely to end badly.