Is It Time to Jump On or Fall OffIf corporate earnings are coming in as expected and first-quarter revenues are light, the one thing that is very noticeable is the continuing improvement in balance sheets.
Cash and cash equivalents continue to see increases, and shareholders’ equity is going up. The result of all this continues to be corporations becoming highly reticent to invest in new operations.
As is the case every earnings season, new stock market buyback programs are announced, dividends are increased, and corporations give corporate outlooks that are fairly unspecific. Many corporations reported that they expect business conditions to improve in the bottom half of the year, which is a bit of a cop-out.
No company wants to risk a major earnings flop, and the fourth quarter of 2013 is still just too far off.
One thing that surprised me so far this earnings season is that I really would have thought that share prices would’ve sold off more after reporting. The lack of selling off, which is quite typical in an earnings season, is indicative of a stock market that continues to have positive institutional investor interest.
The stock market already went up tremendously before earnings season began. I think this is a real sign that institutional investors think that this market can go quite a bit higher.
But it is important to the trading action that the stock market does take a meaningful break. Valuations aren’t stretched by any means, but the lack of revenue growth is a problem.
Very few of the large brand-name corporations reduced their full-year outlooks so far this earnings season—this is a good sign. But still, growth expectations are not lofty; many corporations are only expecting mid-single-digit revenue growth this year.
The most important near-term index for this stock market is the Dow Jones Transportation Average. This important benchmark index briefly fell below the 6,000 level, but it’s back above it now; the index needs to stay above this psychologically important level if the upside is to continue.
In terms of economic news, January and February had positive data, but March is showing some weakness. This makes the case, in my mind, that it will be another “sell in May and go away” type of year again. If this happens, it would not be a worry at all for the stock market.
I’ve seen some stocks go up on bad earnings results, and this is another signal that institutional investors want to be buyers in this market.
If a company misses on its earnings and reports flat to slightly lower revenues but affirms its full-year outlook, then you know that investor sentiment still has legs to carry the stock market a little higher.
In terms of real-time action, I do not think that stock market investors should generally be buying this market. The market has already gone up tremendously since the beginning of the year, earnings results are decent, but revenues are coming in light, and the market is overdue for a significant rest.
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