Earnings season is about to get underway and it’s exactly what this market needs.
But realistically, based on my stock market analysis, there’s not a lot of robust earnings growth out there. Not only is it a slow-growth world, but the stronger U.S. dollar is once again going to have a material impact on currency translation.
The only benefit of lowered expectations is that it makes it easier for a company to beat Wall Street consensus. With this in mind, earnings growth won’t be robust enough on its own to justify a rising stock market.
Stock Market Analysis: Who’s Reporting What?
While monetary policy and global geopolitical events shape the trading action, corporate financial results are the underlying longer-term catalyst.
First-quarter earnings yielded lackluster results with many brand-name companies only able to beat Wall Street consensus on one financial metric. The negative impact of the strong dollar was very evident. Interestingly, however, corporate outlooks for 2016 were quite robust.
Early reporters like Oracle Corporation (NYSE/ORCL), FedEx Corporation (NYSE/FDX) and WD-40 Company (NASDAQ/WDFC) disappointed investors and their shares sold off.
It’s going to be a tough year, both for earnings and share prices. The fact that this market is even flat on the year so far is a function of monetary policy and very low interest rates.
Any Bright Lights in a Slow-Growth World?
So far, there’s been very little in the way of inspiring financial results. Yet one of my favorite stocks for income-seeking investors once again surprised to the upside.
PepsiCo, Inc. (NYSE/PEP)
Although reported GAAP financial growth was still modest, PepsiCo, Inc. (NYSE/PEP) remains a very good business, despite the lack of growth in traditional soda beverages.
Before currency translation, the company’s organic revenue growth was about five percent over the same quarter last year. Gross margin increased nicely and constant currency earnings per share improved 11%. Actual revenues (GAAP numbers taking into account currency translation) for the company’s most recent quarter fell six percent comparatively.
PepsiCo also said that it expects currency translation to negatively impact core earnings per share by 11 percentage points this year.
But reaction to PepsiCo’s latest quarterly financials was positive. This market already expects multinationals to be hit hard by currency translation. (See “Stock Market Second Quarter: What Earnings Say About This Market.”)
PepsiCo expects to pay out approximately $4.0 billion in dividends this year and repurchase $4.5 to $5.0 billion of its own shares.
Bigger Stock Market Picture Remains Positive—But Not Great
While big corporations continue to return excess capital to shareholders (instead of investing in new plant, equipment, and employees), it’s a successful strategy, as recent history proves. Because this is still an environment that’s generally supportive to equities, in the form of extremely low interest rates, mild corporate earnings growth may very well be met with Wall Street buyers.
In the absence of shocks or instability, a slightly positive tone to this market remains. But corporate earnings aren’t going to be great. And this doesn’t particularly support further capital gains from stocks near-term.