4Q14 Earnings Suggest Consolidation to Continue Throughout 2015

Current Stock Market ConsolidationWhile the stock market’s trading action has been pretty subdued, even in the face of fourth-quarter earnings, the market’s actually been in consolidation since last September. It’s a near-term trend that I think will continue into 2015.

4Q14 Earnings Action

While we’re still in the early days of the fourth-quarter 2014 reporting season, so far, earnings reporting is similar to previous quarters. As I mentioned on Monday, if companies do beat Wall Street consensus this quarter, they are typically doing so on only one financial metric and that’s earnings—not sales.

The strength of the U.S. dollar is a material trend in corporate reporting and currency translation is likely to continue being an issue throughout 2015.

Share price consolidation is not unhealthy in a market that’s been going up for two straight years. As the stock market is a forward discounting system, consolidation gives earnings a chance to catch up to prices.

“Share price consolidation is not unhealthy in a market that’s been going up for two straight years.”

I feel that a solid fourth quarter, including decent full-year outlooks for 2015, is currently priced into this market. I’m not surprised to see stocks selling off on solid earnings results.

Weak oil prices have definitely affected sentiment and their dramatic drop has created uncertainty in capital markets that did not exist until just recently.

But with dramatic price action in capital markets comes opportunity. Energy stocks are definitely worth a closer inspection now that the froth has come out of the sector in terms of valuations. There is, of course, no rush to be a buyer here. (See “Oil Stocks: Top Value Sector for Investors Right Now.”)

While I don’t believe in stock market predictions, I would say that there is still a lot of certainty and we’re seeing a positive fundamental backdrop for equities. Corporate balance sheets are strong and the cost of capital is low. The Fed is still totally onside in terms of monetary policy; it won’t raise interest rates until there is sustainable economic and wage growth in the economy.

But coming off of two strong years of capital appreciation and a general uptrend since March of 2009, a flat or down year for stocks is perfectly reasonable.

What to Expect from a Slow-Growth Market in 2015

Small-cap stocks, as evidenced by the Russell 2000 index, were flat in 2011 and 2012, and then appreciated solidly in the market’s breakout of 2013. Throughout 2014, they experienced consolidation.

With this backdrop, I still like dividend-paying large-caps best in a slow-growth (and slow earnings) environment. The prospects for dividend increases and share repurchases remain solid. Companies would still rather return excess cash to shareholders than make major new investments in their plant, equipment, and employees.

We’re seeing all kinds of capital expenditure reductions this year to help maintain earnings. This is notable among energy producers and energy services companies, which have been hit hard on the stock market.

I’d really like to see the Dow Jones Transportation Average stay above 8,500. A breakdown below this price floor would be significant and a noteworthy bearish sign for the broader market.

Still, the best information to guide your market view is corporate financial results. And the earnings onslaught is here.