Old Adage of “Don’t Fight the Fed” Stands, but Big-Cap Earnings Uninspiring

Big-Cap EarningsEarnings season continues and the deluge of results is positively affecting the S&P 500, which is pushing new record highs.

Also continuing its positive upward trend are biotechnology stocks, which still harbor a lot of price momentum from institutional investors.

Ligand Pharmaceuticals Incorporated (LGND) has been very hot since the beginning of the year. The company produced a very strong first half as second-quarter revenues grew 67% to $9.6 million. Earnings were $6.1 million compared to a net loss of $2.5 million.

We’re now seeing a larger number of smaller companies report. They typically take longer to produce their quarterlies because they don’t have the large accounting departments multinational companies do.

Unscientifically, among the large number of companies I follow, I am noticing a more positive second quarter compared to blue chips. This is important, because smaller companies are much more tied to the domestic U.S. economy and, without question, they are stronger drivers of new employment. (See “This Benchmark Company Is Shocking the Street.”)

Mohawk Industries, Inc. (MHK), which is a flooring manufacturing company for residential and commercial customers, leaped higher after reporting second-quarter sales grew 35% to $2.0 million. Earnings per share jumped 61% to $1.84 after unusual charges. Company management said that it is increasingly confident regarding the U.S. market. The position jumped nine percent on the stock market after reporting.

ServiceSource International, Inc. (SREV) is a small company that’s in the business of providing cloud applications to grow recurring corporate revenues. This company announced a solid 13% increase in its second-quarter sales, reaching $67.7 million.

Adjusted earnings were flat, but ServiceSource’s revenue growth was good and the position moved higher on the equity market.

I’m still not a fan of buying many stocks with the main indices at their highs. My key index to watch remains the Dow Jones Transportation Average, and it has been pushing up strongly since toying with the recent low of 6,000 in June.

All in all, investor sentiment is still positive enough (with the Fed onside) for further stock market gains on good news. If a company beats consensus, even on only one financial metric, the Street will bid the shares.

This is very much a difficult market in which to make predictions and be a speculator. There’s momentum out there, but stocks are sitting on a hair trigger when it comes to anything from the Fed.

I view large-cap company earnings this season as uninspiring. Of course, some blue chips are doing better than others. The general trend of little to no top-line growth met with consensus earnings due to cost control remains.

But this isn’t a stock market that is going to come apart without some catalyst, and we know with a good degree of certainty that the Fed is onside (right or wrong) for quite some time. This is what pleases Wall Street, but it’s not necessarily what is good for the long run.

Company earnings expectations have been coming down lately and so have expectations for economic data. As I see it, this market is just one big hold right now. Dividend payments continue.