A Return to the Old Days — I’m Not Sure We Can Handle It

“Ahead of the Street” Column, by Mitchell Clark, B. Comm.

Big, brand-name companies always get the early headlines during earnings season, because they have the big accounting departments to get their books done early. Right now, if you want to know where the broader stock market is going, all you have to do is follow the Dow Transports and the NASDAQ. Railroads and large-cap technology are the two key barometers for this market.

My sense is that the numbers are only going to get better over the coming weeks. The financials always report early and, as we all know, this is still a trouble sector of the economy. Intel’s earnings set a very positive tone for the technology sector, and it will be very interesting to see what companies like Apple (NASDAQ/AAPL), Oracle Corp. (NASDAQ/ORCL) and IBM (NYSE/IBM) say about their operations. These three companies cover most of the technology sector, from the consumer to corporate customer to government. What they report is worth paying attention to.

Like I’ve written before, institutional investors want to be buyers of stock right now. All they need is a catalyst and it doesn’t have to be a big one either. The fact is that there just isn’t anywhere else for big investors to put their money and this provides a solid fundamental backdrop for the stock market this year.

Previously, I wrote how the economy and the stock market are in the process of normalizing themselves. As it relates to the stock market, this means that the market is likely to provide more modest returns to investors; the kind of returns that are a combination of dividends and humble capital gains. This is the way it used to be on the stock market.

It’s pretty difficult to picture large-cap companies seeing their businesses take off anytime soon in this economy. I just can’t imagine Procter & Gamble Co. (NYSE/PG) generating new double-digit revenue growth because the soap and deodorant markets start booming. So, what we can expect is incremental top-line growth, which will translate into incremental bottom-line growth over the next few years.

This is the normalization that I’m referring to. Economic normalization in the housing market, in employment, in the trucking business, and in the stock market. The hard part going forward will be the same normalization of investor expectations.