No doubt, trading volume for a lot of stocks has been on the decline, and while this is traditionally a sign of a market that’s topping out, this potential outcome would be well-deserved and no surprise.
It’s the lull between earnings seasons and the beginning of summer trading action. Volume is going to be lighter, and stocks are due for a correction—even a big one. So I don’t think this market is running out of gas; it’s just tired and investors are looking for catalysts.
Following earnings forecasts, old-school technology stocks like Microsoft Corporation (MSFT) and Oracle Corporation (ORCL) are seeing their estimates going up for 2015. And Wall Street’s even nudging estimates for the financials higher.
Even if stocks are tired and volume is declining, rising estimates for next year is a positive trend.
As most blue chip corporations did OK in the first quarter of 2014 (see “1Q Earnings Not Giving the Market the Boost It Needs”), one commonality among many multinational companies was improving business conditions in Europe. It will be very interesting to see if this trend holds during second-quarter reporting. If it does, it increases the likelihood that multinational businesses will see their 2015 earnings estimates nudged higher yet.
Street estimates for Caterpillar Inc. (CAT), which is a very international business, have been going up across the board for this year and next. While the market expects total sales to be basically flat in 2014 (compared to 2013), current consensus is for around six-percent sales growth in 2015.
And there’s a similar scenario with other Dow Jones stocks like Cisco Systems, Inc. (CSCO) and The Walt Disney Company (DIS). But rising estimates for 2015 aren’t uniform among many Dow stocks, so there is still a great deal of uncertainty as to whether corporate earnings can actually gain momentum over the next several quarters.
For most of May, share price action in the S&P 500 was pretty flat. It’s only been in the last 10 days when stocks showed renewed price strength.
I still view investment risk as quite high, as stocks have already gone up tremendously over the last five years without a material price correction. There’s no rush to buy anything in this market.
And there’s not a lot of value around, even among those positions that are down from their 52-week highs or even close to their lows. Everything is seemingly priced into this market. Hold your existing winners and sit on some cash until asset prices are more attractive.
Rising earnings estimates, even sporadic, are positive signals, especially among multinationals. A research analyst’s forecast for the future must always be taken with a grain of salt, but blue chips are pretty good at working with the Street. Plus, big corporations don’t like to disappoint and that’s factored into their collaboration with research analysts.
Stocks aren’t trading in a particularly healthy manner, and it’s been like this all year. Digesting the breakout capital gains from last year is proving to be lengthy.
But I don’t believe this isn’t a market that you have to walk away from given current information. A shock will obviously cause a correction but sentiment is improving for 2015 earnings and that, in itself, is a positive catalyst.