What Companies’ Earnings Are Telling Us About Where the Market is Headed

Most large-cap companies are not reporting great earnings, and this makes sense. You can’t have runaway earnings in an economy with very slow growth. But corporations are increasing their dividends and improving their balance sheets. If it matters to individuals, large-cap corporations are looking great and any pick-up in business will go right to the bottom line.

Canadian National Railway Company (NYSE/CNI), a company with an excellent track record of making money on the stock market, just reported solid earnings that met consensus. The company announced an increase in its quarterly dividend by 15%, representing the 17th time it has done so since 1995.

Of course, the stock market is taking all the earnings news with a grain of salt. No one company is blowing the doors off Wall Street estimates. According to the numbers I’m reading, corporations are once again being highly conservative with their earnings outlooks for the rest of the year. They have to be, because there’s very little in the way of real economic growth available.

Johnson & Johnson (NYSE/JNJ), which is a great benchmark stock, reported fourth-quarter revenues just shy of consensus. The company’s 2013 full-year earnings forecast also came in just below current consensus. Still, Johnson & Johnson’s largest business—medical devices and diagnostics—grew to $7.4 billion, for a solid gain of 13.7%. On the stock market, Johnson & Johnson has been doing well lately. The company’s long-term stock chart is featured below:


Chart courtesy of www.StockCharts.com

Most big brand-name companies are holding their earnings with modest revenue growth. It will be very interesting to see what happens when we get into large-cap technology reporting. We’re still not quite into the heart of earnings season, and I’d like to see more increases in dividends.

The stock market is taking all of this in stride, and while the right shoulder formation of the S&P 500 continues to form, the trading action is quite uninspiring. The S&P 500 is one heck of a scary-looking chart on a long-term basis. You can see the heady days for the stock market leading up to 2000. The index lost about half its value when the technology bubble burst, then it made it back, only to lose it again during the financial crisis. I just hope that history doesn’t repeat itself one more time. Going by this index, you might think that stock market investing isn’t worth it. The S&P 500’s stock chart is below:

Chart courtesy of www.StockCharts.com

I think the stock market has a little more upside left over the near term. It’s probably going to be another “sell in May, and go away” type of year. The good news is that stocks aren’t expensively priced; the main stock market indices are right where they should be. I have virtually no expectation for capital gains this year. Dividend income is all I’m expecting. (See “Dividends, Buybacks, and Spin-offs—That’s All There Really Is.”) Corporations are doing their part in keeping earnings afloat, but the U.S. economy needs more time to balance itself out after its recent excesses.