The Only Thing You Can Bank on Near-Term
The stock market is absolutely where it should be, given current earnings—and it’s across the board; from large-cap to small-cap, valuations are fair. But the real telltale sign will be first-quarter earnings season. The stock market wants to see growth, and it actually doesn’t need much of it in terms of the bottom line. This market wants to see revenue growth or stocks will go into correction.
Corporations, especially large ones, have done an exceedingly good job of maintaining their earnings through the last recession and the modest economic recovery. They’ve done this through diligently controlling costs, doing little in the way of new hiring, ensuring productivity gains per existing worker, and using technology. The health of U.S. corporations is very good; for individuals, it’s a whole other story.
Corporations have also been very conservative with their earnings outlooks, making it easier to outperform or beat the Street. With the large cash hoards that corporations have been built up by not investing in this economy, companies are keeping investors happy with increased dividends, even with the prospect of no earnings growth.
This stock market is due for a correction; but it’s still unclear whether there will be decent buying opportunities when this correction occurs. If this upcoming earnings season disappoints, then new buyers will be better off holding out for future weakness.
The S&P 500 has to show more breakout strength in order for the rest of the stock market to follow. We need technology stocks to further accelerate, along with the industrials. But in reality, what the stock market is doing now is really more of an expansion in earnings multiples. With very little growth in actual earnings per share, stock market action reflects improved sentiment among institutional investors, most of who get paid to buy stocks.
With the main stock market averages at their highs, investors are buying on hope that the U.S. economy isn’t coming apart in the first quarter. Economic statistics so far show that it isn’t, but that doesn’t mean that corporations are hiring vast amounts of new workers, and it most certainly doesn’t mean that individual incomes are going up.
The headwinds for individuals remain arduous over the near-term. Higher payroll taxes and price inflation for everyday expenses are killing consumption. Cutbacks in government spending, which unfortunately are a large portion of economic activity, are going to reverberate across the market over the next several quarters.
Most individual investors are very skeptical about the stock market’s prospects this year, and rightly so. The stock market is not in a new bull market; it’s in a market that’s still recovering from the last major bubble in 2000. It’s taken a long time just to get back to where we were.
Federal Reserve policies, high sovereign debt in the eurozone and the U.S., and the inability of policymakers to act decisively for the long-term interest of Americans are formidable roadblocks for wealth creation. None of these fundamentals are going to change anytime soon.
There really isn’t a lot of new action to take on the role of investors right now. Oil prices will continue to be under pressure, while gold still has more room to correct. The stock market is appropriately valued, but corporations must show growth this earnings season. The only near-term certainty is growth in money supply and dividends.