With the stock market having a solid year, some might think that investor sentiment is properly calibrated with regards to the corporate earnings of the market. I would say that most of the investor sentiment is geared towards buying stocks because of monetary stimulus, which I think the majority of companies will have a hard time translating into corporate earnings growth.
I’ve already warned readers that companies are issuing warnings of which they should be aware; this includes what I wrote in my article “FedEx Warns of Economic Slowdown.” Now another company has come out with shockingly bad guidance—Norfolk Southern Corporation (NYSE/NSC).
Norfolk just announced that corporate earnings will be below the estimates that analysts have calculated. This will certainly affect investor sentiment for this stock, but it should also be a concern to a wider scope of companies. Both FedEx and Norfolk are in the business of shipping goods. The fewer shipments these companies transport, the slower the economy.
While I did estimate that coal shipments would decrease, as natural gas has plummeted in price, Norfolk also cited much lower shipments of merchandise than expected. Combining all of these factors, corporate earnings will continue to not grow until the economy substantially picks up steam.
Because both Norfolk and FedEx transport such a wide spectrum of goods, I worry that we’ll have corporate earnings come in below estimates this fall. While the market can run ahead with the giddy anticipation of monetary stimulus, the hard reality of lower corporate earnings could be a sobering splash of cold water to the face. With the market at such high levels, we could certainly have a pullback over the next few weeks if more companies lower their corporate earnings guidance.
Norfolk announced that it expects corporate earnings per share for the quarter to be $1.18–$1.25, versus the previous average estimates from analysts of $1.63.
Chart courtesy of www.StockCharts.com
While investor sentiment has been somewhat solid for Norfolk, this warning caused a dramatic sell-off in the stock. As we all know, stocks move up slowly, but they go down very fast, in the same way that the overall market has been creeping up for most of this year; if companies continue to announce drastically lower corporate earnings, we could see more sharp downward shifts in investor sentiment.
I would certainly wait for this next quarterly corporate earnings season before accumulating more shares. If investor sentiment adjusts this dramatically, perhaps we might get a better entry point later this year. With the uncertainty in the market and more companies announcing a dramatic slowdown, this is usually not the best time to start initiating new positions. Wait and thoroughly research the corporate earnings reports coming out this fall and have patience. Rushing into any investment is a recipe for disaster.