All kinds of companies are reporting good news now, but it may not be enough for the stock market to keep appreciating. A new earnings season is just beginning, but these seasons come and go awfully fast. What this stock market needs is a new catalyst. Without one, I think the main averages will drift lower.
There always is a kind of lull in equity trading after earnings and this happens even if the numbers are strong. Already, I’m reading some very good news by all kinds of companies in a variety of industries. It’s a very positive sign, but I can’t escape the notion that stock prices have already gone up—in my view, investors have already priced in the good news.
A new catalyst could come from the Federal Reserve, but we don’t really need any more monetary stimulus. As is almost always the case, the central bank has been the most important influence in equities. A very accommodative monetary policy is the reason why things are getting better, both in the economy and on the stock market. If it wasn’t for the Fed’s quantitative easing II (QE2) policy, stocks might not have recovered from last summer’s extreme negative sentiment. Even if QE2 means nothing to you and your personal situation, that policy action was a confidence creator for financial markets.
The problem now is that the central bank is pretty much out of options and it doesn’t want to over-stimulate the economy for fear of stoking the fires of inflation. So, we’re left with a big unknown. What is the catalyst that’s required to take stock prices higher? Really, it’s only the economy.
It’s pretty well assured that corporations are going to report very good earnings for the fourth quarter and year-end 2010. But, these numbers are padded in a sense, because the comparable fourth quarter of 2009 was terrible and because big companies have done a very good job of squeezing their costs. This inflates earnings and isn’t sustainable.
So, for me, the most important numbers to be reported this earnings season (and next) are revenues. Top-line sales growth is the key this year so that corporations can keep their earnings growing. We’ll see what the big, brand-name companies have to say. Their earnings should be strong, but let’s keep a sharp eye on revenue growth. If there’s not much in the way of top-line sales growth, this market will be in trouble in the not-too-distant future.