What We’re Looking for this Earnings Season

stock market adviceIt’s earnings season again and it could help to drive trading over the next several months. There are clearly some high hopes of seeing sales growth in addition to earnings acceleration as the economy recovers, but hopefully it will be an improvement over the second quarter.

In my view, the key will continue to be the ability of companies to report sales that are higher, which is what you want to see during an economic recovery, as it indicates increased spending. Earnings can be made to look better via cost cuts and control. In addition, watch for guidance going forward, as this will also be a key factor.

With the third quarter completed, there will be much anticipation for the third and following quarters to see if the gains continue.

Alcoa Inc. (NYSE/AA) will start the flow with its report on Thursday.

Advertisement

In the second quarter, we did not see a consistent increase in revenues or the growth was marginal. In order to feel more confident, revenue growth needs to be strong.

Technology will be a critical area to see since this sector has provided much of the leadership over the last several years. Intel Corp. (NASDAQ/INTC) made a downward revision in its revenue guidance for the important third quarter, blaming soft demand for PCs. Since Intel supplies chips to about 80% of the world’s computers, this is not a good sign. Adobe Systems Inc. (NASDAQ/ADBE) also provided a warning, as it expects to see softer demand. Add in the previous comments from bellwether stocks General Electric Co. (NYSE/GE) and Cisco Systems Inc. (NASDAQ/CSCO) and you’ll understand the potential problems. It appears that big technology is witnessing sub-par demand and this is not good, and may filter to the smaller technology companies.

In other areas, The Home Depot Inc. (NYSE/HD) saw its revenue growth stagnant at two percent year-over-year and fell short of Wall Street estimates. Rival Lowe’s Companies Inc. (NYSE/LOW) also cut its revenue outlook due to spending concerns.

Retail bellwether Wal-Mart Stores, Inc. (NYSE/WMT) reported a small gain in sales and a decline in same store sales in its second quarter. The results added to the poor results at J.C. Penny Company Inc. (NYSE/JCP) and point to continued weakness in consumer spending, which impacts GDP growth.

As I have said, the key will be revenues, especially organic growth. We want to see revenues grow to drive earnings instead of cost cuts. Without revenues growing, it is difficult to imagine a healthy economy, which I’m concerned could hamper growth.