Why Corporate Earnings Are Taking a Back Seat to the Fed

blue chipsThe second-quarter earnings season is considered over, but there are still a number of companies reporting. And the same trend continues—the numbers are anemic.

Making the case for a rising stock market in the face of little sales growth and earnings results that are basically just meeting expectations is difficult. The stock market’s performance for the last few years has been very much due to the monetary expansion, followed by a slight improvement in general business conditions.

What is clear is that corporate balance sheets continue to be extremely healthy. However, the lack of investment in new plants, equipment, and employees remains a big problem. There is more certainty in the marketplace, but corporations just aren’t making much in the way of bold new investments.

Despite the mediocrity, there are still a number of blue chips whose earnings estimates are being increased by Wall Street. In a lot of the earnings results from blue chips over the last several quarters, sales increases have mostly been due to rising prices, not necessarily rising volumes. This is emblematic of the very slow growth environment the U.S. economy continues to experience, as well as the economic misnomer that price inflation is tame.


The velocity of money, which is the willingness of both corporations and individuals to spend cash, continues to be faint. Improving balance sheets is an excellent development for the long run, but cash hoarding means no growth near term. It’s a trend that’s likely to continue.

While not much of an advocate for buying in the stock market today, I do think that it’s wise for investors to stick with the safest names—to keep holding those blue chips who have been the market’s leaders to date.

Some of these names include: The Procter & Gamble Company (PG), Johnson & Johnson (JNJ), Pepsico, Inc. (PEP), The Walt Disney Company (DIS), Nike Inc. (NKE), The Home Depot, Inc. (HD), and Union Pacific Corporation (UNP), to name a few. (See “Where to Find an Investment Opportunity in a Market That’s Much Too High.”) These are the proven blue chips, with increasing dividends providing the earnings certainty that institutional investors will continue to pay for.

The way the stock market finishes this year is highly dependent on the Federal Reserve and the amount of monetary stimulus stirring the system. This is a market about the perception of certainty, not the reality of it. Economic news of late shows the U.S. economy to be very tame in its recovery, with regional- and industry-specific fractions very much a reality.

As things go in capital markets, good news in the form of positive economic statistics or earnings produces a falling stock market. Good news also increases the probability of a reduction in monetary stimulus.

This is the reality of the extreme short-term focus of capital markets. For equities, the market –extremely focused on the Fed; corporate earnings are secondary.