My Prediction for This Earnings Season

dividendTrading action in the stock market is quite good. The main stock market averages crossed new benchmarks and valuations are not yet stretched. Another earnings season is just around the corner and there have been no major earnings warnings from big-cap companies. All in all, the near-term outlook is pretty good.

Another positive signal is the recent upward turn in the Dow Jones Transportation Average. This important, leading index was showing quite a divergence from the rest of the stock market. The broader market can’t really advance without transportation stocks; trucks and railroads are the backbone of the industrial economy and they lead the Main Street economy. It’s early days, but transportation stocks are expected to report good numbers this earnings season and this will be the confirmation the stock market needs to advance further over the coming months.

The Federal Reserve, it would seem, is doing a pretty decent job of re-inflating the economy. (See Stock Market…What More Does it Want?) The U.S. employment picture is improving slightly and so is consumer spending. There is price inflation in the economy and that has both good and bad aspects. Prices for raw materials continue to tick higher, but rising prices help come earnings season.

We saw price inflation work during the last couple of earnings seasons where many larger corporations reported that they were able to increase their selling prices without affecting demand. Considering that companies are running such lean operations, any price inflation at the top goes right to the bottom line. That’s why the upcoming first-quarter earnings season should be solid. The stock market is already making its bets.

The way the news has been coming, we should see a marked improvement from the financial sector this earnings season and this will be another boost to the stock market. This sector has been a real laggard obviously, but recent news regarding dividend increases was very positive. No matter how investors feel about the big U.S. banks, they are an integral part of the global economy and their financial health is important.

Earnings seasons are always the best times to be reevaluating a stock market portfolio. You can make some event-driven trades as well, particularly if a company beats consensus. This earnings season should surprise to the upside. The industrial economy is getting better and we’re now seeing this trickle down into the Main Street economy. Stock market action in the near term continues to look solid.