Earnings Finally Catching Up to Stocks This Reporting Season?

Market Action Subdued by 4Q EarningsWith U.S. oil and gas production surging, you’d expect a company like Halliburton Company (HAL) to be doing well. The company is a major provider of hydraulic fracturing services, otherwise known as “fracking.”

However, the surprise in the company’s latest results wasn’t financial strength in domestic operations, but in business conditions in the Middle East and Asian markets. The company’s 2013 fourth-quarter revenues grew to a record $7.6 billion, up two percent sequentially.

For the year, the company noted that Eastern hemisphere operations provided 17% year-over-year growth, while also contributing a 23% gain to adjusted operating income.

In comparison, North American fourth-quarter sales fell one percent and adjusted operating income dropped six percent due to weather-related disruptions and holidays.

The company just slightly beat consensus and the stock sold off on the news.

We’ve been getting quite a few stocks selling off after reporting, which is more normal trading action.

Johnson & Johnson (JNJ), a benchmark stock, also sold off after reporting fourth-quarter revenue and earnings that beat consensus, conservatively guiding 2014 earnings per share to the low end of the forecast.

Delta Air Lines, Inc. (DAL) moved a point higher after the company announced a strong fourth quarter on lower fuel costs. Management expects meaningful margin expansion this quarter. This stock has doubled since last April and is a bullish indicator for the U.S. economy.

On balance, the numbers, so far, are decent, but they aren’t really strong enough to warrant new bidding action, largely because stocks are already fully valued.

If anything, fourth-quarter earnings results should be justifying current share prices. A company’s latest financial results are like confirmation of last year’s share price appreciation. Strong share price action should really only occur if corporate outlooks exceed previous forecasts.

With this in mind, this stock market is very much a hold. As companies often do, dividend increases were announced in the fourth quarter, so there shouldn’t be a lot of big dividend news this earnings season. I find company dividend increases are often more prevalent in the bottom half of the year. For now, we’ll probably get more share buyback announcements and more stock splits.

Stocks selling off after meeting fourth-quarter guidance is perfectly healthy. (See “Top Market Sectors for 2014.”) If there isn’t going to be a correction, then prolonged consolidation is useful in terms of allowing earnings to catch up with share prices.

Dividend-paying blue chips are still a favorite place to be, and I see no reason why they can’t tick higher over the next several years, given current information. Large corporations have the economies of scale, the pricing power, and the best potential for margin expansion.

But generally speaking, a fully invested, balanced portfolio of stocks doesn’t require much in the way of new positions after 2013’s incredible performance. Valuations among more speculative issues are extreme and while the market’s top growth stories can always tick higher if the broader market is strong, current trading is pretty subdued.

The adage “sell in May, and go away” is a real possibility again this year in terms of price consolidation. There’s no need to sell blue chips; there’s not much reason for big new positions either.