Stock Market: Watch Earnings, the Only Metric That Matters to the Bull Market

Watch EarningsStock market advice for a market already at or near its all-time high is just guesswork. This market could crash on some material event, it could stay in consolidation for several quarters, or it could tick higher in anticipation of a better 2016.

What has happened is that expectations for corporate earnings have come down tremendously. So it doesn’t take much for the Street to be fairly pleased with mediocre results.

A lot of earnings reports so far are showing comparable sales declines, largely due to currency translation, with low single-digit growth from the domestic market. It’s still early of course, but a lot of companies are confirming their 2015 full-year outlooks. Both corporations’ sales and Wall Street’s earnings expectations for 2016 continue to be quite robust.

Follow Real Corporate Earnings

The brokers are always good businesses to follow to get a feel for equity investor sentiment.

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The Charles Schwab Corporation (NYSE/SCHW) has seen its share price accelerate tremendously since the stock market’s breakout at the beginning of 2013. The stock has more than doubled over the last two-and-a-half years and the company pays a dividend.

Schwab’s second quarter of 2015 was actually pretty good. The company produced a six-percent comparable gain in sales to $1.57 billion with a nine-percent gain in earnings to $353 million.

The company’s most recent quarter represented its best ever for net client asset accumulation at $37.0 billion on a 16% increase in newly opened client accounts—which is telling in itself.

Earnings Roundup So Far

Delta Air Lines, Inc. (NYSE/DAL) and UnitedHealth Group Incorporated (NYSE/UNH) beat the Street with their bottom lines.

Global businesses are no doubt dealing with currency issues. And that’s having a material effect on their financials.

What there isn’t (so far) is robust sales growth. It’s still a slow-growth environment and companies, through strong cost control and hoarding, are able to maintain their earnings while keeping shareholders relatively happy with dividends and share repurchases.

In terms of share price performance, this is a business strategy that has seemingly worked for large corporations. Bold new investments in plants, equipment, and employees continue to be a rarity.

Reminiscent of a marketplace trading on low expectations, Intel Corporation (NASDAQ/INTC) beat the Street with its earnings on a five-percent comparable decline in sales and flat comparable earnings per share. Intel’s stock went up on the news. We’ve seen a lot of this lately.

Last year, the equity market went up on expectations that the Federal Reserve was going to raise interest rates. The thinking was the Fed would only do so if the economy could handle it.

Once again, I believe sentiment is strong enough for this to play out again later this year. The first rate hike could very well be the catalyst for a fourth-quarter rally. (See “Stock Market Crash 2015: Is it in the Cards?”)

With fairly robust corporate outlooks and Wall Street earnings expectations for 2016, I wouldn’t be surprised if stocks play out like this going into 2016. Sideways trading action until a fourth-quarter rally is possible going into next year.

In any case, sales growth is not robust. And while companies are doing everything they can to maintain their earnings, top-line improvement is the only way for corporate earnings, and therefore the stock market, to be securely in a secular bull market.