Stock Market Needs This Earnings Season to Give It Some Direction

micro-cap stocksIt continues to be uncertain times for the stock market. You get good news, the stock market goes down; you get bad news, the stock market goes up. With no definable trend, you could say we’re in a market where anything could happen. This is why investment risk is so high.

I’m hopeful about this upcoming earnings season and it’s exactly what the stock market needs—to see some results from corporations themselves. The lull between earnings season can always produce some stock market volatility because investors trade emotionally, based on news from policy makers and government statistics. The only rationality comes from corporations whose numbers are audited and whose estimates for the future are generally quite accurate. Earnings season can’t come soon enough. At the very least we’ll get some definable trend in the earnings reports off of which to trade.

Expectations for this earnings season and the rest of the year have come down quite a bit, which is why we’ll see some solid outperformance and the likelihood of an upward bounce in the stock market. There have only been a handful of earnings warnings from big, brand-name companies, but this is a good sign. There’s also a reasonable stock market valuation and a marketplace that wants to be buyers. I fully expect that dividend paying blue chip companies will continue to provide stock market leadership in the current environment. Ever since the stock market low set in March 2009, big-cap companies have been the place to be. Many have provided the kind of capital appreciation you’d expect from faster-growing micro-cap stocks.

I admit, however, that it is difficult to get enthusiastic about business and the stock market during a period of economic stagnation. Waiting for the business cycle to play itself out is never any fun. A lot of investors are just hedged in this kind of stock market. Very few institutional investors are sticking their necks out with big bets. I suspect that we’ll get another stock market correction before this year is out for the simple reason that the economy isn’t strong enough to hold investor sentiment. (See “Stock Market Correction: Why it’s Limited.”)

Oil prices are the best gauge for the current state of things. Below $80.00 a barrel is a real punch in the stomach, and it reveals a real dissatisfaction. The stock market is holding up very well at this time, and there is hope this earnings season. Before second-quarter earnings season officially begins, the few corporate reports to be filed showed solid business strength. As I’ve said, earnings season can’t come soon enough. The stock market needs to hear what is really going on with businesses, instead of trading off government news reports.