Top Market Sectors for 2014

Transports in 2013 Financials in 2014We won’t really get into the heart of the fourth-quarter 2013 earnings season until late January into early February. Smaller companies typically take longer to report, as they don’t have the large accounting departments that blue chips have.

I’ve noticed that quite a number of Wall Street research analysts have been boosting their 2014 full-year earnings expectations. They’re playing the same old game of cat and mouse with corporations and research analysts. Corporations always want to “outperform” if they can, so they deliberately keep their outlooks pretty conservative.

Companies getting a boost to their full-year earnings outlooks include: Wal-Mart Stores, Inc. (WMT), Microsoft Corporation (MSFT), Colgate-Palmolive Company (CL), Oracle Corporation (ORCL), E. I. du Pont de Nemours and Company (DD), Exxon Mobil Corporation (XOM), and Verizon Communications Inc. (VZ). Even Intel Corporation (INTC) is having its earnings outlook nudged higher by the Street for several upcoming quarters, including all of 2014.

According to FactSet, eight out of 10 S&P 500 market sectors are expected to report an increase in fourth-quarter earnings; these sectors are led by a strong expected gain in financials, followed by the telecom and industrial sectors. Energy is expected to produce a decline, comparatively.


While revenue growth from financials should be lackluster to negative on a comparative basis, a strong expected gain in earnings will be market-boosting news. Countless financials have been doing very well on the stock market since last November.

Over several of the last quarters, companies reported they were able to increase their selling prices without materially affecting demand. Sales growth has been a combination of increased volumes and rising prices.

Extreme monetary expansion wreaks havoc with the natural ebb and flow of capital markets, as we’ve seen. The share price performance of stocks in 2013 dramatically exceeded the amount of earnings growth as compared to 2012; therefore, the case can be made that stocks may sell off on a good fourth quarter.

Regardless, I still see a positive disposition to the equity market and, combined with certainty on short-term interest rates, we could very well get another positive year in the key stock indices.

Now is the time for corporations to live up to expectations. The earnings-multiple expansion last year now needs to be fulfilled and it will be a daunting task, as there is a lack of consistency among industries in terms of business conditions.

Equity market price strength in the financial sector always bodes well for the rest of the market. I would use the Dow Jones Transportation Average and financial stocks as two important indicators for the rest of the market.

At this specific point in time, I don’t see a lot of action to take in terms of a new portfolio strategy. (See “These Two Proven Wealth Creators Should Be at Top of Investors’ Wish List.”)

A well-balanced portfolio, including dividend-paying blue chips, would be well positioned for more gains this year, as large-caps have the earnings power. If anything, the current environment is a great time to re-evaluate your exposure to risk and perhaps lighten up on some winning speculative positions.

Fourth-quarter earnings season is just around the corner, and it should be decent like the last three. This market, however, is looking for a catalyst to sell. It hasn’t found one yet, but there definitely is one on the horizon.