The stock market isn’t likely to advance strongly unless corporate visibility beats current consensus; but, so far, large-cap second-quarter earnings are coming in very solid. In fact, I view the numbers as mostly excellent all things considered. The stock market would be a lot higher than its current level if the sovereign debt issue were behind us. We’ve got to get a handle on country debt in a planned, systematic fashion. Then, global investors would feel a whole lot better about putting their money in the markets.
Two benchmark companies stand out as reporting very good financial results in the second quarter. Both Johnson & Johnson (NYSE/JNJ) and IBM Corporation (NYSE/IBM) beat the Street with their earnings. Johnson & Johnson expects to meet current expectations for the year, while IBM increased guidance. Both stocks should break through to new highs this week.
Also coming in strong were Halliburton Company (NYSE/HAL) and Hasbro, Inc. (NASDAQ/HAS). All these large-caps reported very good revenue and earnings growth in the latest quarter and it makes me think that the stock market is actually slightly undervalued at its current level. Some companies have missed consensus, but, for the most part, they haven’t been what I consider to be benchmark companies. Frankly, I view the corporate numbers so far as outstanding.
If the only thing investors had to worry about was second-quarter earnings, then stock prices would be a lot higher. The numbers are solid and so is corporate visibility. And, we can’t forget that this is happening in a period of very slow growth domestically. Many of the companies that reported so far generate significant revenues from international operations, especially inAsiawhere growth rates are higher. And we have a generally weaker dollar, which is padding the numbers. But I want to come back to the one thing that big companies are very good at during slow economic times—and that’s cutting costs. Large corporations excel at slashing and burning on expenses and most don’t care whether it’s labor or equipment. This is why I continue to expect large-caps to be some of the best-performing stocks this year and next. They have the pricing power, cost control, and economies of scale to turn slow economic growth into impressive earnings.
If the current trend in earnings continues and we don’t have a cascading currency crisis inEurope, the stock market should be set for a significant rally. Investment risk remains high because of the sovereign debt issue; but in terms of domestic corporate fundamentals, it’s looking like it’s full steam ahead.