There’s a tremendous amount of noise surrounding the stock market. And so it’s important to cut through it to focus on what really matters as an equity investor: what corporations are actually saying about their businesses.
Even though the stock market is a secondary pricing mechanism anchored by monetary policy, it is a system that generally tries to discount a future stream of earnings.
With so much institutional money floating within the system, pricing frequently gets irrational. But that in itself contributes to the opportunity and the investment risk inherent in owning equity securities.
How Have Earnings Been So Far?
So far this earnings season, there have been a number of good reports despite the relative strength of the U.S. dollar, along with a few disappointments. It would seem that corporate streamlining still has some velocity to earnings.
Competition for stocks has been fierce the last few years with institutional investors bidding earnings safety and dividends to a lesser extent.
As we know, this market has already gone up in anticipation of better corporate performance. Earnings have been playing catch-up to share prices.
What Does This Mean for the Stock Market?
Given where the stock market has come from, and the numbers and outlooks currently provided, there’s no particular reason why stocks should do anything near-term.
In the absence of some kind of shock, this stock market just may stay in consolidation. Expectations for this year’s sales and earnings growth are reflected in share prices.
Early quarterly reporting reveals a number of things. Currency translation is having a material impact on financial results. This is a well-known expectation.
Lower fuel prices are providing a significant boost to earnings in those businesses where fuel costs matter.
And the pricing trend over the last few quarters continues. Slight increases to corporate selling prices are not affecting demand in many industries—which is really helping the bottom line.
Early in the season, earnings reports are typically from well-established brand-name companies as well as industrial names. The technology sector is the key to this earnings season. Spending on information technology is a top predictor for stocks.
In a sideways stock market, dividend income is all the more important. The good news is that there is plenty of will on the part of companies to increase their dividends and share repurchases to help pay for them. (See “Oil Price Weakness: 5 Stock Market Picks to Watch for Value.”)
There is absolutely no rush to buy this stock market and there’s very little in the way of value in it.
For risk-capital-oriented investors, there is better value now among many oil stocks. This is particularly the case among domestic junior energy producers.
But as it always goes with resource investing, underlying commodity prices guide everything.
What’s in Store for the Stock Market This Year?
Corporate reporting so far reveals some slowing of business conditions and recent economic data confirms this.
While predicting the stock market is an inadequate endeavor, I wouldn’t be surprised if we get continued price consolidation right into the fourth quarter.
It’s going to be another good year for those dividends.