Earnings Season Update: Stock Outperformance on the Horizon

 

Earnings Season UpdateIt’s still early days this earnings season, and in spite of some warnings from some big, brand-name companies, I remain hopeful that a number of industries will announce good earnings reports. The stock market is understandably nervous about global economic growth and the potential for declining earnings outlooks. Regardless of what transpires this earnings season, the best thing going for the stock market is its valuation, which I think is bang on.

So far, the earnings warnings have been specific and not industry-wide, which is a positive. The financials are about the report, and they will set the tone this earnings season. As you know, the trading action in the stock market is all about the future—what the growth picture is and the earnings outlook. I don’t see a major stock market crash in the immediate future (barring a war or currency shock); we’re more likely to get continued mediocrity in the trading action. What I think will transpire from this is that the stock market will move with declining earnings expectations. As these expectations come down, the stock market will slowly drift.

The S&P 500 Index is currently up about five percent since the beginning of the year and, combined with dividends, is about where it should be. It is a tough environment for large, established businesses to generate growth, but smaller companies are still able to produce double-digit revenues and earnings growth. The problem of course is that this stock market is more interested in dividend income, and institutional investors have been shying away from smaller companies due to the greater investment risk. On balance, it remains a very tough environment for stock market speculators. This earnings season is no exception.

Earnings season is about to get into full swing, and while oil prices remain depressed, spot gold is holding up very well. (See “Gold and Silver Stocks Drifting, But Mining Stock Fundamentals Just Keep Getting Better.”) Just under $1,600 an ounce, the spot price of gold is saying that global worries are real and that speculators are willing to hold the commodity with all the potential shocks out there. More and more investment banks are predicting $2,000 an ounce for gold, and while this doesn’t mean it will happen, the underlying fundamentals for the commodity remain intact.

The stock market needs some good news this earnings season, and I think investors will get it. As it’s been in previous quarters, some industries will be doing better than others. Choppy trading action in the stock market reflects the choppy performance of the U.S. economy. The stock market is fairly valued given the earnings outlook, and companies have been very conservative with their visibility. There will be outperformance because of this, so I think it’s fair to expect the stock market to bounce higher this earnings season, based on corporate performance, and bounce lower on the economic news.