The stock market continues to be mediocre. Economic data from abroad isn’t particularly inspiring. Investors are likely to yawn at first-quarter earnings season results this year as they did with earnings for the fourth quarter of 2014.
If there is an overarching theme to the stock market’s action this year, it’s that the Federal Reserve is now the main catalyst likely to change investor sentiment.
Investor Sentiment Expecting Little This Earnings Season
For a number of quarters now, countless brand-name companies were able to beat Wall Street consensus estimates—typically on only one financial metric (either earnings or revenues).
This earnings season, we’re likely to see corporations only confirming existing guidance for the year, as management teams don’t want to stick their necks out too far this early in the year.
Investor sentiment is fully aware that U.S. dollar strength is going to, once again, play a material role this earnings season. This reality should therefore have less of an impact on overall market action, much like a company taking a one-time charge that the Street ignores.
It will be very interesting to see how eurozone operations are doing according to large multinationals. Last quarter, we got an inkling that business conditions were improving slightly.
In any case, expectations for corporate earnings this year are pretty modest. Subsequently, I think it’s reasonable to view current stocks as fully valued.
All Eyes on Federal Reserve Policy
So far during the current bull market, the stock market has mostly experienced consolidation instead of full-blown corrections. Monetary policy is a big reason for this. The stock market is setting itself up for sharper price retrenchments when the interest rate cycle changes.
While corporations still boast decent balance sheets, there has been a lot of new debt added in the recent cycle. With the cost of capital so low, it’s easy for large-cap companies to borrow for new share repurchases.
If there is a cautionary tone to first-quarter corporate reporting, it will affect the likelihood of dividend increases going forward. Some share price value is now present in the energy sector specifically, but there isn’t much more to go around this stock market. Accordingly, there’s no rush to be a buyer. A review of portfolio investment risk is always worthwhile.
Last year, investor sentiment improved on the prospect of a changing interest rate cycle. The theory was that the Federal Reserve would only raise rates if the economy was strong enough.
A number of utility stocks recently sold off, eliminating the capital gains that were generated during the fourth quarter last year. As a sector, it is typically the first to tip, as the cost of capital is expected to tighten and expectations to fall.
While earnings reporting is still only at a trickle, value in this stock market is evidenced in an energy company like Northern Oil and Gas, Inc. (NOG), a small-cap producer in the Williston Basin of North Dakota and Montana. (See “Oil Stocks: Top Value Sector for Investors Right Now.”)
But while another earnings season will be welcome intelligence for a tired-out stock market, the Federal Reserve has the reins this year.