It would be so wonderful if the sovereign debt crisis in Europe was not at hand. It never pays to live in a fantasy world, but corporate earnings are coming in so good that the market would be a lot higher if we didn’t have to worry about country debt.
According to a report by Bloomberg, of the 98 S&P 500 companies that have reported earnings since July 11, about 85% have exceeded analyst estimates. That’s a big deal and it’s a testament to the jobless economic recovery we seem to be experiencing. A lower dollar certainly is a big help to domestic corporate earnings and so are faster growing economies in emerging markets. That’s the real power of American large-cap multinationals; they have a strong ability to translate international operations into profits at home.
If you feel a certain stock market malaise right now, you have a lot of company. Investor sentiment is positive, but only slightly so. Everyone is worried about the future with the exception of large corporations. When subprime mortgages caused the recession, big companies were shaken by the enormous erosion of their share prices. It really seemed that the sky was falling. After the stock market reckoning, the recession really did cause management at big companies to fundamentally change their view of the world. The age of austerity took over as the new management credo and, subsequently, already-lean enterprises honed their expenses to the max. Now we’re seeing the effort of all that austerity in earnings results that are just plain excellent in relation to Gross Domestic Product (GDP) growth.
All kinds of large-cap companies are hitting record and new 52-weeks highs on the stock market right now. Baxter International Inc. (NYSE/BAX) just reported very good financial results that beat consensus and the company increased its guidance for the year. The stock is trading right at a new 52-high and doesn’t look expensive. Colgate-Palmolive Company (NYSE/CL) just hit a new record price on the stock market. This company hasn’t reported yet, but the shares don’t look pricey, and the current yield on the stock is 2.6%. Then there’s International Business Machines Corporation (NYSE/IBM), which reported strong second-quarter results based on its services business. This stock is trading at a new all-time high of $185.00 per share and is up a solid 50% since the beginning of September.
When a company like Bloomberg does a survey saying that 85% of S&P 500 companies have so far beaten consensus estimates, I believe it. There is a lot of corporate strength out there, but not retail strength. The trickledown effect will take much longer to pan out.
There’s no real momentum in the stock market, but earnings are on the right track. I see the broader market ticking higher over the near term unless the sovereign debt issue messes with confidence.