The Dow Jones Industrials gave up most of their gains this year in the recent stock market selloff; given current fundamentals, this market is oversold. Strife in the Middle East definitely affected investor sentiment last week, but the market is now betting that U.S. policymakers will address the fiscal cliff issue before the end of the year. Across the board, expectations among equity investors have come downward; this gives stocks the potential to outperform in the fourth-quarter earnings season.
During the third-quarter earnings season, we saw large-cap, international businesses impacted by economic weakness in the eurozone and China. Chinese economic data has improved in recent weeks, although like everything nowadays, you have to consider the numbers with a grain of salt. In order for this stock market to advance, it requires improvement on the part of the Chinese economy; it goes without saying that the eurozone will be in no-growth mode well into 2013.
The latest earnings season saw large-cap companies report very conservative outlooks for the rest of this year. Corporations also showed difficulty in growing revenues, while earnings themselves held constant. (See “Where’s The Good News? Companies Just Meeting Expectations.”) Stock market valuations, however, are very reasonable at this time, and this provides a floor to the recent selloff. Still, without earnings growth, the stock market won’t really be able to advance in a meaningful trend.
One company that’s really been hit hard over the last six months on the stock market is Intel Corporation (NASDAQ/INTC). After reporting that its earnings were affected by weakness in Europe and, to a lesser extent, strength in the tablet market, Intel’s shares started selling off significantly. The stock has been so weak lately that its current price-to-earnings (P/E) ratio is below nine, while the stock’s dividend yield is now a hefty 4.5%. Intel has been very diligent at increasing its dividends to stockholders, but the stock itself hasn’t done a thing for the last 10 years. The company’s recent stock chart is featured below:
Chart courtesy of www.StockCharts.com
Given the fact that the U.S. economy is really only growing at the rate of inflation, the stock market isn’t going to advance in a meaningful way. In order for the stock market to experience a new bull market, we need a new business cycle to begin, and the U.S. economy may even have to endure another recession before this can happen. The Dow Jones Industrials are stuck at the same level they were five years ago.