Daily Gains Letter

Earnings Results Ahead of the Economy, Day of Reckoning on the Horizon

By for Daily Gains Letter |

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Corporations are reporting a mixed bag this earnings season. Some companies are outperforming, while others have come in just a little bit short with their numbers.

The one thing I would say, however, is that the balance sheets continue to be outstanding, especially in large-cap companies. This gives a lot of leeway for corporations to weather any economic storm down the road.

PepsiCo, Inc. (NYSE/PEP) reported wonderful earnings results in its first quarter. The stock popped four percent after reporting its earnings, with news and management affirming solid guidance for the rest of the year. This is one of many corporations that can do well on the stock market throughout the rest of this decade.

Some corporations reported basically zero growth, but that doesn’t mean that business conditions have gone bad. The fourth quarter of 2012 saw a gross domestic product (GDP) that was just terrible, and so it’s unreasonable to expect the first-quarter GDP of 2013 to be outstanding.

But what I am reading so far in many earnings reports is that corporations are expecting business conditions to get better, especially towards the end of the year.

Union Pacific Corporation (NYSE/UNP) is another benchmark stock that jumped four percent after reporting great earnings. Even if you don’t own this stock or wouldn’t consider it in your portfolio, it pays to read this company’s numbers, because it’s a great barometer on the U.S. economy. Railroad corporations are leading indicators and Union Pacific was able to grow its earnings by increasing prices—a very good development.

There are still all kinds of earnings reports to come in, and what this stock market needs if it’s going to be continuing in a sustainable uptrend is more leadership from the technology sector.

With this in mind, however, this is a market that is quite extended and desperately in need of a full-blown correction. I think this would be a very healthy development for the stock market as a whole. Without a correction, the market risks getting ahead of itself in terms of valuation.

Corporations are doing their job well. They’re keeping costs down and, like they’ve been doing the last couple of quarters, corporations have been able to raise prices without materially affecting demand. Corporations have been keeping earnings afloat by not hiring, demanding more productivity from existing workers instead.

Persistent weakness in Europe and slower growth in China are a concern, but my feeling is that the U.S. economy is able to sustain a little bit of growth momentum based on its own progress. If there is going to be a global economic recovery, it’s going to be led by the U.S. market.

Even Verizon Communications Inc. (NYSE/VZ) beat the Street with its latest earnings numbers, showing solid growth along most business lines.

Still, the individual performances of corporations are ahead of the U.S. economy. Economic statistics continue to show mediocrity in many important metrics.

The stock market is way ahead of the Main Street economy. Its day of reckoning is now on the horizon.

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