Technology and Financials—Exactly What the Stock Market Needs to Test Its Five-Year High
It won’t take much for this stock market to rally, even though the outlook for corporate earnings is flat and risks like the sovereign debt crisis in Europe are unsolved. The fact is that the stock market in the near term is only looking for one thing: certainty.
With extremely accommodative monetary policy, the interest rate cycle favors equities. But while the stock market has proven it can basically hold up with the prospect of flat earnings, it can’t survive declining earnings (or revenues). Really, the stock market just wants certainty regarding the fiscal cliff in the near term. Then we’re into fourth-quarter earnings season, which will be the real news.
One of the first technology stocks to report next week, ahead of fourth-quarter earnings season, is Oracle Corporation (NASDAQ/ORCL). This company is a good benchmark for enterprise-level technology spending. In its last earnings report, the first fiscal quarter of 2013, the company’s Generally Accepted Accounting Principles (GAAP) earnings grew 11% to $2.0 billion, but revenues disappointed, falling two percent over the comparable quarter to $8.2 billion. On the stock market, Oracle’s share price sold off after its earnings news but has since recovered in an otherwise trendless stock market. Oracle’s stock chart is featured below:
Chart courtesy of www.StockCharts.com
Oracle is actually trading close to its 52-week high, and with a price-to-earnings (P/E) ratio around 16, the stock is not expensively priced. Near-term quarterly earnings estimates have been reduced on the company, but are actually going up for fiscal 2014.
One technology stock that’s really struggling these days is Hewlett-Packard Company (NYSE/HPQ). Three years ago, the stock was trading around $50.00 a share; now it’s $14.00 a share, having recently bounced off a multi-year low of $11.35. This Dow Jones component just can’t seem to execute its business plan well. Top-line growth is stagnant, and the company’s earnings are declining. Hewlett-Packard’s stock market chart is below:
Chart courtesy of www.StockCharts.com
At its current share price, Hewlett-Packard (HP) has a stock market capitalization just under $30.0 billion. (See “Many Stocks Already Experiencing Their Own Market Correction.”) In my view, this makes it awfully tempting for investors to buy out and sell off the company in pieces. I won’t be surprised at all if this happens.
There is no real reason why the stock market should accelerate, given current fundamentals. We do have the certainty of continued monetary stimulus by the Federal Reserve, artificially keeping interest rates low. There is seemingly more willingness for U.S. policy makers to take action on fiscal policy, and there is an uptick in economic news from China. All things being equal, I think the stock market is where it should be, with any upward move in share prices resulting in changes to investor sentiment, not fundamentals.
Until this past September, large-cap technology stocks were leading the stock market. We need this group to reaccelerate for the broader market to do so. Resurgence among financials would also be a positive sign for the rest of the market. On balance, we remain in a trendless environment for stocks. With the fiscal cliff, the debt ceiling, and corporate earnings that don’t show decline, I think the S&P 500 will test its five-year high from 2007, barring any outside shocks to the system.
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