Economic Consolidation, Choppy Stock Markets, and Then a New Inflationary Business Cycle

New Inflationary Business CycleThere’s good anticipation for corporate earnings as the second quarter comes to a close. No stock market analyst is expecting anything great, but with the stock market’s fair valuation and an already muted outlook, I think we’ll see some good upside surprises.

With only a handful of exceptions, there haven’t been many corporate earnings warnings or preannouncements, and this is always a good sign; it means that consensus estimates aren’t too far off. We should see some corporate earnings weakness from large, international companies that have a heavy presence in foreign consumer markets. The Procter & Gamble Company (NYSE/PG) recently announced business was slow in emerging markets. This is why I think domestic-oriented big-cap companies have the best potential for outperformance this earnings season.

The U.S. economy is still trying to balance itself out after the subprime mortgage bubble that knocked the economy (and the stock market) into neutral. I figure we have a couple more years of choppy, muted economic growth, as Main Street and the stock market work through the excess inventory in the housing market. Once the housing sector is on a solid footing, I think we will have good potential for a new upward business cycle to begin. Corporate earnings growth may be modest over the next year or two, but there’s no reason why it won’t accelerate as the U.S. and Chinese economies get through this slowdown.

We can’t forget that the Federal Reserve is being extremely inflationary with its current monetary policy. Because the subprime mortgage meltdown was so pervasive, the stimulus hasn’t yet kick-started the economy; the stimulus has only helped to keep the U.S. economy out of a technical recession. My view is that eventually the huge increases to the money supply and the artificially low interest rates are primed to launch the U.S. economy forward on an inflationary boom. The result, aside from higher prices, will be much-improved corporate earnings.

With this scenario, gold and resource investments should do well. (See “Gold And Silver Stocks Drifting But Mining Stock Fundamentals Just Keep Getting Better.”) The stock market can handle quite a bit of price inflation before consumers stop spending, and because most companies are already running such lean operations, corporate earnings growth will easily accelerate.

The stock market is about to hear from companies about the state of their businesses. This is exactly what the investing marketplace needs at this time. Expectations for corporate earnings already came down starting in the fourth quarter last year, so there is decent potential for some upside surprises. Practically, corporate earnings growth won’t be robust. A company can’t grow its bottom line without the top line doing well. The big brand-name companies will carry investor sentiment over the next month, and I can’t wait until the numbers come out. The stock market needs to get its mind off the eurozone.