What the stock market needs now is for second-quarter earnings season to get underway. Hearing from corporations this upcoming earnings season and their expectations for the rest of the year will provide a respite from worrying about Greece. The stock market will be trading off Greece’s political news and that country’s upcoming election, which will be happening shortly.
As far as I’m concerned, earnings season can’t come soon enough. While earnings expectations have been coming down, my bet is that this will make it easier for most big-cap companies to beat the Street. By the time second-quarter earnings season comes around, most companies have a good sense as to how the rest of the year is going to play out. Corporate visibility this upcoming quarter will be very telling.
For a number of quarters now, companies have been very conservative in their forecasts for the future. Just like consumers, corporations have become extremely risk-averse and they have tempered future expectations in order to make it easier to “outperform” come earnings season. On balance, I see no reason at this time why the stock market won’t get another decent quarter of corporate earnings results. For a number of quarters now, big business has been saying that they’ve been able to increase their selling prices without affecting demand and this translates right into the bottom line. Corporations are still very reticent to invest in new plants, equipment and new employees and the uptick in top-line growth translates easily into earnings.
I think it’s fair to expect some disappointments this upcoming earnings season, particularly from large, international companies that are more exposed to slowing growth in BRIC (Brazil, Russia, India and China) countries. This is why I’m now a strong advocate that stock market investors make a point of keeping new investments as domestic as possible. (See U.S. Economy: What Freight Haulers Are Saying About It.) The North American economy is where you want to be over the next few years; investment risk is just too high elsewhere.
Right now, the sovereign debt crisis in Europe is calling the shots for domestic stock market action. This always happens between earnings seasons; stock market investors can only focus on economic news and geopolitical events. But the most important factor for investment decisions is always what corporations are saying about their businesses and that’s why earning seasons are always the best times to make any adjustments to an equity portfolio.
Because expectations for corporate earnings and the stock market have come down quite a bit recently, there is good potential for some nice surprises this earnings season. It’s my hope that the problems in the eurozone can be contained enough so good earnings news can be the catalyst for a rising stock market. It’s going to be a wacky year for equities and making predictions is virtually impossible. The stock market won’t act rationally if sovereign debt problems in Europe get out of control. Without this risk, the market would be a good 10 percentage points higher.