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VIDEOSecond Quarter Earnings: Companies Beat but Investors Shrug
By
Josh Lipton Jul 27, 2010 7:30 am
Why we're about one-third of the way through the season and the stock market is up only 1.5%.
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(This week, earnings reports will continue to flood the morning papers as the front offices of BP (BP), US Steel (X), ConocoPhilips (COP), ExxonMobil (XOM), and Chevron (CVX) tell us how they’re performing.)
Barring any major write-downs in the Financials sector, market pros point out, the second quarter will mark the S&P 500’s sixth straight positive earnings surprise following six negative surprises in a row through the fourth quarter of 2008. (HT: Yardeni Research)
Yet, your friends and neighbors could care less: The stock market is up just 1.5% since the reporting season kicked off two weeks ago.
This collective shoulder shrug by investors can be explained, market pros write, by a few different factors: guidance that’s been decidedly mixed and revenue growth that’s been lagging for the most part.
So says Michael Pento of Euro Pacific Capital, who notes that about 30% of companies have missed their revenue projections.
“Top line growth isn’t there,” the economist says. “You can’t keep burning your furniture to keep your house warm forever. There is a lot of spending reductions going on.” (Pento adds that he sees investment opportunity in multinational dividend payers like Philip Morris (PM), short-term Treasurys, and precious metals).
More broadly, says Vinny Catalano of Blue Marble Research, second-quarter earnings are backward-looking and investors are instead more concerned right now about what lies ahead. Specifically, they’re worried about whether this decelerating US economy slips into a double dip, or a relapse into recession.
It’s a worry that Catalano says he shares. “I believe that deceleration could rather easily tip into a recession so I am staying cautious,” he tells Minyanville, adding that, in the equity market, he’s Underweight Financials and Consumer Discretionary and slightly Overweight Technology.
On that same note, Gluskin Sheff’s David Rosenberg emphasizes that the quarterly earnings numbers aren’t capturing the extent of the slowing that’s occurring in the economy right now.
The iconoclast reminds us that earnings are over a quarter, but tell you nothing about how the momentum moved over the quarter. The second quarter, he says, included April and just about everything in the economy in April was hitting a peak, but the economy has since slowed, with 80% of economic indicators over the past month undershooting consensus estimates.According to a USA Today poll, 80% of the economics community has now cut GDP growth forecasts to an average of 2.5% for the rest of the year from the 3% call in April, as professional number-crunchers react to turmoil in Europe, lackluster job growth, a weak housing market, and a slowdown in factory output.
Other strategists we checked in with sounded more modestly bullish, however. Burt White, LPL’s chief investment officer, believes there is still more room to the upside here.
The strategist says the market already had priced in a solid earnings season and that, coupled with an initial few mediocre earnings reports and soft economic data, led to this underwhelming response from investors. But the market will move higher, he contends, as it adjusts to the fact that what we’re now experiencing, in his opinion, isn’t a change in direction for the economy but merely a shift in the speed of the recovery.
“This soft spot is like a turn in a racetrack, from straightaway to a turn,” he says, adding that, “The market just needs to re-price that and once it does, we springboard to 1150, maybe 1200 by the end of the year.”
White likes the cyclicals: Industrials, Materials, and business-oriented Tech, in particular.
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No positions in stocks mentioned.
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