The stock market is consolidating now, and it’s a healthy development. The main stock market indices did not sell off after the Federal Reserve announced a third round of quantitative easing (QE3), and it’s good for stocks to have a break before third-quarter earnings season begins.
There is an underlying strength to the stock market now, and there is good potential for further capital gains in the near term, as investor sentiment is buoyant. I still feel, however, that the stock market is in the process of topping out and that it cannot maintain its upside without acceleration in corporate earnings.
In spite of the earnings warnings we’ve had to date, there’s been good news for stock market investors in the form of dividend increases. McDonalds Corporation (NYSE/MCD) is the latest big-name company to increase its dividend to stockholders. The stock moved nicely higher on the news, and the company’s current dividend yield is about three percent. Here’s a recent chart on the stock:
Chart courtesy of www.StockCharts.com
Microsoft Corporation (NASDAQ/MSFT) is another brand-name company that recently increased its dividend payment to shareholders. There are lots of companies in the stock market today sitting on excess cash, and it is very likely that we will get more share buybacks and dividend increases this third-quarter earnings season. It’s a reality in today’s economy that corporations would prefer to return cash to shareholders than make new investments in manufacturing facilities, equipment, and/or employees. It is a contributing factor in the U.S. jobless rate.
Large-cap technology stocks powered the stock market so far this year and their performances this earnings season are absolutely key. They don’t need to outperform current consensus; it will be enough for investor sentiment if they just maintain their current outlooks. A handful of large-cap technology companies are the stock market leaders, and if they turn, it’s highly likely the rest of market will as well.
All eyes this earnings season will be on Apple Inc. (NASDAQ/AAPL), Google Inc. (NASDAQ/GOOG), and Amazon.com, Inc. (NASDAQ/AMZN). These stocks have been powerhouse wealth creators this year and they are priced for perfection. Oracle’s latest quarterly earnings went up, but revenues were light, and Intel recently gave an earnings warning for its upcoming quarter. (See “A Fork in the Road for the Stock Market.”)
The NASDAQ Composite is up about 22% this year and still looks to be in a primary uptrend. This is the most important stock market index to follow, because it’s the leader. When the stock market turns, large-cap technology stocks will do so first.