From what we’ve seen so far, I think that first-quarter earnings are going to be kind to the financial sector and the big U.S. banks specifically. This bodes well for the stock market and its continued positive outlook this year.
It’s been an amazingly strong stock market so far and it couldn’t have happened without stability from the Federal Reserve, stability regarding sovereign debt problems in Greece, and the expectation of good corporate earnings. We haven’t had virtually any earnings warnings in the first quarter and the Dow Jones Transportation Average has made a full recovery from its recent correction, while oil prices have been over $105.00 a barrel. These are the makings of a bull market, albeit one that will likely be short-lived.
Corporate earnings, especially among big-cap companies, have been really strong over the last few years considering everything that’s transpired. We had a major financial crisis where the stock market and housing market collapsed, a recession, and the threat of a euro currency disintegrating. Good corporate earnings haven’t been what investors were looking for over the last few years (they wanted certainty that the world wouldn’t fall apart), but I think they will be from now on.
The stock market’s been going up, because there is more certainty in the global marketplace, but also because institutional investors were making bets about good corporate earnings. It’s the same “buy on expectation and sell on news” strategy that often takes place. Really, investors are looking for good corporate visibility even more than good earnings this year and I think they are going to get it. Because of all the crises over the last few years, U.S. corporations also went into crisis mode and, for the most part, they are running very healthy operations. Balance sheets have never been better and, with tight cost controls, any uptick in the economy (which we’re now seeing) will go right to the bottom line.
The marketplace wants to see good earnings, but, more importantly, investors want to know that the bottom half of the year will be better than we currently expect. If we get this kind of news, then I expect the stock market to take another leap higher. If we don’t get great corporate visibility, then the stock market will immediately correct.
Practically, the stock market is still very well-valued considering the earnings produced last year. There is lots of room for the stock market to advance further if the corporate news isn’t bad. Being an election year in so many jurisdictions, it’s highly likely that policymakers around the world won’t want to rock the boat. (See What Could Ensure a Good Stock Market Performance This Year.) With a very strong performance from the NASDAQ so far, I think first-quarter earnings are going to be surprisingly strong.