It Won’t Be Vintage, but It’s Shaping up to Be a Good Year for Stocks

By Mitchell Clark, B.Comm. — Ahead of the Street column

Large-caps have been running up in price since the middle of February, and you can bet that the market has already priced in robust first-quarter earnings. If the numbers don’t add up, we’re going to get a selloff.

One group that usually reports right at the beginning of earnings season is the financials. This time around, the big banks will have a big effect on sentiment, and they will likely set the tone for the rest of the earnings season.
With short-term interest rates very low and longer-term rates rising, I think that we can expect the banking sector to generate some very good numbers in the first quarter. If they don’t, institutional investors will be very unhappy.

Very shortly, we’ll also hear from big, stalwart companies like Intel Corporation (NASDAQ/INTC), Microsoft Corporation (NASDAQ/MSFT) and International Business Machines Corporation (IBM) (NYSE/IBM). Accordingly, the Street will have a good assessment of the health of the technology sector. Investors have been expecting this sector to outperform this year, and a lot of Street analysts recently upped their quarterly and annual earnings guidance for the big, brand-name companies.

So, it’s a wait-and-see kind of market as earnings season begins. If the financials and technology do well, I think that the stock market will take off to the upside. This is a distinct possibility. Anything other than beating consensus estimates and visibility that’s guided higher, and I think that we will get a stock-market correction.

As an equity investor, you’ll want to be careful taking on new positions during earnings season. Sentiment will change on a dime once the big companies start reporting, and you can easily get caught on the wrong side of a changing market. The volatility, however, is
useful for speculative traders. This is especially the case when you have something like a U.S.-listed Chinese stock that beats estimates on earnings and visibility. There’s money to be made trading around these news events. Just remember that strong risk management is more important than expected returns.

I think that it’s reasonable to anticipate that unemployment will continue to be the thorn in the economy’s side this year, but that corporate profits will surprise to the upside. A recovery in real estate and employment sets up 2011 to be the year of inflation and interest-
rate hikes. This is likely to happen worldwide.

In my view, dividend-paying large-caps offer the best return-versus-risk ratio for equities, especially considering the volatility that is inherent in risk-capital securities like Chinese stocks. The strong stock-market performance that we’ve seen from a lot of big
companies so far this.