The stock market is now in a wait-and-see mode, in anticipation of second-quarter earnings season. You can see this in a lot of individual companies that were the stock market’s leaders before the correction. A good example of this is International Business Machines Corporation (NYSE/IBM), which sold off slightly during the stock market correction. IBM then recovered, but not back up to its 52-week high, because we’re so close to earnings season, and institutional investors want to wait and see how the numbers turn out before making any big bets.
Expectations for this earnings season and the rest of the year have come down significantly over the last several months. Excluding Apple Inc. (NASDAQ/AAPL), S&P 500 earnings growth is expected to be about flat with last year, which means no growth. Any surprises to the upside or increased guidance from corporations will be met with solid buying from institutional investors. (See “Earnings Season Can’t Come Soon Enough.”) The stock market’s valuation has plenty of room for earnings multiple expansion.
This earnings season will be make-or-break for the stock market and for the S&P 500 Index to remain above 1,325. We’re unlikely to get too much in the way of capital appreciation in the bottom half of the year, unless of course, the economic news really improves. For the last several years now, corporations have become extremely conservative with their earnings outlooks, not only because business conditions have slowed, but also to make it easier to outperform come earnings season.
The stock market doesn’t need companies to outperform this earnings season—what it needs is reassurance. Some certainty that business conditions are not deteriorating will go a long way toward keeping investor sentiment positive over the coming months. Everyone expects little in the way of earnings growth, and that’s realistic, because you can’t expect companies to grow their revenues and earnings if the general economy is experiencing little to no economic growth. Some certainty for the bottom half of the year should be enough to keep investors happy this earnings season, and I think we’re going to get it.
One stock market sector that may experience some weakness is the retail sector. The industry did relatively well in the first quarter, but several companies recently announced that consumer spending at their stores has fallen. Other international consumer products companies noted the slowdown in emerging markets, and this will be the source of some earnings disappointments. The U.S. dollar was relatively strong during the second quarter because of the turmoil in the eurozone; a stronger dollar doesn’t translate into stronger earnings, so we’ll see what effect this had on the bottom line.
This earnings season, I’m optimistic that the numbers will come in close to what the marketplace already expects. The stock market needs certainty that business conditions are solid enough to finish out the year on a slightly positive note. That’s all we need for some further stock market gains. Earnings season is always the most interesting time of the year.