We’re getting into the heart of first-quarter earnings season and the stock market to me seems appropriately valued. But, while corporate earnings are decent, no brand-name companies are hitting their numbers out of the park. And this begs the question; how can the stock market advance? My answer is that I don’t think it can much further.
Corporate earnings are so far coming in as expected. Slight out performance, especially on earnings per share, is pretty much a standard goal of corporations and is reflected in guidance. The stock market appreciated in advance of this earnings season and therefore is due for a consolidation. The next catalyst for an upward move in the equity market will have to be economic news and it will have to be fairly good in order to move the market.
There is a little momentum in employment, spending and housing construction, but I think it’s fair to say that most analysts expect only modest good news on the economy. The Federal Reserve has done all it can to try to re-inflate the U.S. economy and will continue to print money at a record rate to prevent a recession. This is why I’m just cautiously optimistic about the coming quarters and, as an investment strategy in the stock market, I’m advocating large-cap dividend paying stocks for the vast majority of a portfolio. In my mind, investment risk in equities is too high, not having the securing of dividends. (See TJX Companies: One of the Best Stocks (and the Most Boring) in the Marketplace.) The money is there on the part of institutional investors to move share prices dramatically, but as the marketplace has proven, prices go both ways.
I’ve actually been impressed with the stock market’s reaction to corporate earnings so far. Because out performance is only slight, I expected stocks to sell off more on their earnings news. At the beginning of the year, consensus among Street analysts was for earnings growth of about 10% in 2012. This continues to sound reasonable to me and so the stock market can only advance then with expanded valuations. With the current information, I think the S&P 500 Index might have another 100 points of upside left this year. Investors therefore don’t need to be big buyers in this market. I realize there are not many options for investors with new money to invest. Other asset classes pay hardly anything over the inflation rate.
If you have the desire, pull up a long-term chart (40 years) on the S&P 500 Index. You can see the dramatic head and shoulders pattern that the stock market’s experienced. It’s an eerie looking pattern that begs the questions: how will it end? I don’t have the answer to that question, but what jumps out at me given the current information and where the stock market’s been is an overabundance of caution. That’s why dividends and a little gold are the best assets in the age of austerity.