Fourth-quarter Earnings: Taking the Market’s Pulse

Fourth-quarter Earnings Season: Looking Good?The stock market is off to a good start so far this year and so is earnings season. In spite of lingering risks regarding the global economy and the eurozone debt crisis, things are looking up. We’ve had some uptick in the recent stream of economic news and institutional investors are buyers in the stock market due to solid expectations for corporate earnings. With the broader market reasonably valued, more near-term upside is likely.

Earnings season is always an exciting time of the year and, this time around, the numbers should be better than expected. Not every sector is going to have a good fourth quarter, but the industrial economy should once again deliver solid growth to stockholders. Oracle Corporation (NASDAQ/ORCL) reported disappointing numbers in its latest quarter and the stock sold off on the news. But, then again, Macy’s, Inc. (NYSE/M) surprised the marketplace by increasing its outlook in the retail sector and even boosted its dividend. So, just like the Main Street economy, things are still choppy out there, but the general trend this earnings season should be a positive one. (See What Recession? These Stocks Hitting All-time Record Highs—a Great Indicator.)

The stock market, as measured by the S&P 500 Index, will have achieved a real breakout if it can breach and stay above 1,300. If this happens, this large-cap index will have broken out of its correction trading range last year and set itself up for a new trend (which I think will be positive). Fourth-quarter earnings season is looking solid and therefore share prices should advance if there’s no major new shock from Europe. Predicting what’s going to happen to the stock market later this year is impossible. There remains too much uncertainty. This is why institutional investors are buying now, because the near-term outlook has improved. There isn’t any long-term outlook because there can’t be.

I wrote previously that the stock market in 2012 could perform similarly to how it did in 2011, with a strong start to the year, followed by consolidation, then weakness. It’s all up to this year’s economic data and the eurozone debt crisis. I’m worried less about the other major card: financial results this earnings season and next quarter.

According to Bloomberg, S&P 500 earnings have beaten estimates for the last 11 quarters, which is an impressive performance. But, despite a continuous number of solid earnings seasons in 2010 and 2011, the stock market has been held hostage by other factors. Really, investor sentiment has been downright awful since the stock market cratered in 2008.

I have high hopes this earnings season, and large corporations continue to boast excellent balance sheets. With an uptick in business (in the fourth quarter of 2011), cash balances should continue to swell and that means two important things will happen this year: more share buybacks and increasing dividends.