Who the Stock Market Leaders Will Be This Earnings Season

Stock Market Leaders Will Be This Earnings SeasonCountless blue chips are in consolidation mode, which is completely normal before reporting—however, some of the stock market’s best-performing blue chips have been consolidating since May.

While expectations (including my own) were that the stock market would experience a full-blown correction after such a strong breakout at the beginning of the year, we got consolidation instead. It’s another small sign that there is still underlying strength to this market. With decent earnings from blue chips, the stock market can still advance further this year.

As usual, investor sentiment is easily derailed by geopolitical events and/or the unwillingness of policymakers to enact laws (the debt ceiling, for example) that foster certainty in the marketplace. History keeps repeating itself.

These factors are beyond your control as a stock market investor, but they really do take away from business. Capital markets and corporate planning require certainty. In the absence of it, business investment just dries up.

The Dow Jones Transportation Average is looking pretty good right now. This index has provided real leadership, especially compared to the Dow Jones Industrial Average. It’s an old-school, bullish signal for the rest of the stock market. I expect the upcoming earnings from its component companies to be decent.

Getting back to blue chips; countless brand names are waiting to advance further, but these corporations have to meet or beat consensus in order to do so. Institutional investors have been very accommodating the last few quarters. Even during second-quarter earnings season, investors still bid the shares of companies that didn’t meet or beat consensus in either revenues or earnings. (See “Another Earnings Season Suggests Another Quarter of Slow Growth Ahead.”)

The Walt Disney Company (DIS) was exceptionally strong on the stock market since the beginning of the year. But like so many other market-leading large-caps, the position’s been flat since May. The Procter & Gamble Company (PG), PepsiCo, Inc. (PEP), Wal-Mart Stores, Inc. (WMT), and Colgate-Palmolive Company (CL) have all traded in a virtually identical manner.

With decent earnings results, it’s likely that the consolidation among big brand-name companies will be over and a new uptrend could develop in these leading positions. The macroeconomic backdrop, with low interest rates and exceptional central bank support, is still favorable for equities.

The flipside is that with the key stock indices at or near their all-time record-highs, an expansion of valuations has resulted, instead of genuinely good revenue and earnings growth.

Investment risk remains high in the stock market, and there is no need for investors to rush into any positions. This market is very much a hold, with no particular catalyst as a standout for buying.

Dividend-paying blue chips have the attention of institutional investors, and they’ve been the place to be over the last three years. With exceptionally good balance sheets and growing cash positions, I see no reason why stock market leadership won’t stay in this group.