Earnings Season Is Here; Will the Numbers Be Kind?

Earnings SeasonThere is positive momentum going into fourth-quarter earnings season. The earnings results we’ve had so far from brand-name large-caps are encouraging. We can’t forget, however, that expectations and consensus estimates have come down a lot, especially because of third-quarter earnings results. I think the stock market will be pleasantly surprised when it gets results from the key financial and technology stocks. Outperformance should be plentiful, but only because of the reduced outlooks.

Oracle Corporation (NASDAQ/ORCL) reported great numbers in its latest earnings report. The stock is trading right at its 52-week high, and if you eliminate the huge upward spike in the company’s share price in 2000, its long-term stock market chart is excellent.

Oracle Corporation Chart

Chart courtesy of www.StockCharts.com

Oracle is a good barometer for enterprise technology spending. After its recent earnings report, across the board, Wall Street analysts increased their expectations for the coming quarters. The fact that Oracle recently reported such a good quarter bodes well for the rest of the technology sector.

Another big-name company, which experienced tough business conditions last quarter, is NIKE, Inc. (NYSE/NKE). The company’s most recent earnings report showed a marked improvement in its financial metrics, with particular strength coming from the U.S. market. NIKE is a good barometer on consumer spending, and the company’s long-term track record on the stock market is excellent. NIKE’s stock market chart is featured below:

NIKE Inc Chart

Chart courtesy of www.StockCharts.com

Still, no one is expecting runaway growth, in terms of earnings or revenues. And there is no bankable trend in the economy as of yet. Strength in fourth-quarter earnings could easily turn out to be a one-shot deal.

I’m cautiously optimistic regarding the stock market this year. The interest rate cycle still favors stocks, and dividend payments are solid. But while the stock market is fairly valued, generating real earnings growth is going to be difficult. Corporations are about as lean as they can be.

One encouraging sign, from a technical perspective, is the strong breakout performance of the Dow Jones Transportation Average. This stock market index was a real laggard in 2012; it recently moved strongly upward. I am a believer in Dow theory and that the stock market really can’t advance meaningfully without confirmation from transportation stocks, as they are such an important component of the U.S. economy.

It’s been difficult, however, for the stock market to provide the kind of enthusiasm needed to get individual investors participating to the degree that they once were. (See “Earnings, Earnings, Earnings—They’re All This Market Needs.”) Crises and extreme price volatility have a habit of discouraging people. Last year was a pretty decent year for stocks, but the performance was choppy. I expect more of the same for this year; no bold bets at this time.