Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

NASDAQ Composite in Jeopardy—Earnings Growth Disappearing

Thursday, November 15th, 2012
By for Profit Confidential

NASDAQ Composite in JeopardyDaily stock market trading action is without conviction, and there have been countless days when the trading session starts out positive, only to end in negative territory. In corporate earnings, we continue to see the lack of consistency in business conditions among industries. Revenue growth is low and, in a lot of cases, it’s not due to organic demand.

Cisco Systems, Inc. (NASDAQ/CSCO) reported solid revenue growth of 5.5%, bringing revenues to $11.9 billion in the stock’s latest quarter; but this growth was mostly spurred by discounting prices. The company’s adjusted earnings grew to $0.48 a share, beating consensus of $0.46 a share, due to increased sales and job cuts. The company has cut almost 8,000 jobs over the last year, according to Bloomberg, and revenues and earnings in the current quarter are expected to come in flat. Cisco’s stock chart is below:

Cisco Systems Chart

Chart courtesy of www.StockCharts.com

While the stock market was pleased with Cisco’s latest numbers, they really weren’t that great, all things considered. (See “More Dividend Increases Coming Soon—Is This Good or Bad?”) Competition, as the company refers to it, is fierce, and weakness in the eurozone, which represents about a quarter of the stock’s total business, is hampering the company’s growth. It’s a very similar story to a lot of large-cap technology companies. Growth in revenues and earnings is disappearing.

The breakdown in large-cap technology stocks is now pronounced, and I don’t see the broader stock market being able to advance without this group. Countless blue chip names within the sector are deteriorating significantly in this market; many of which were the stock market’s leaders at the beginning of this year. Microsoft Corporation (NASDAQ/MSFT) is the perfect example, as you can see in the chart below.

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Microsoft Corp Chart

Chart courtesy of www.StockCharts.com

I think technology stocks are slightly oversold at this time, but their earnings outlooks don’t offer much hope. It’s going to be another quarter or two before we see any potential for earnings growth from the big names in this group, and the main stock market averages will suffer for it.

The NASDAQ Composite is in a clear downtrend and has been since the beginning of October. Technology stocks within the index are not expensively priced on the stock market, but that’s appropriate—the earnings growth just isn’t there.

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Mitchell Clark - Equity Markets Specialist, Financial AdvisorMitchell Clark, B. Comm. is a Senior Editor at Lombardi Financial specializing in large- and micro-cap stocks. He’s the editor of a variety of popular Lombardi Financial newsletters, such as Income for Life and Micro-Cap Reporter. Mitchell, who has been with Lombardi Financial for 17 years, won the Jack Madden Prize in economic history and is a long-time student of equity markets. Prior to joining Lombardi, Mitchell was as a stock broker for a large investment bank. Add Mitchell Clark to your Google+ circles

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