Daily Gains Letter

Do This One Thing to Steer Clear of the Noise This Earnings Season

By for Daily Gains Letter | Apr 11, 2013


Earnings season has begun. Companies on the S&P 500 are issuing their corporate earnings reports for the first quarter of 2013. But with all of this comes a significant amount of noise. Some stock advisors are calling for a reversal in the markets, saying we can’t go any higher; others are saying that we are only going to go higher.

Unfortunately, the amount of noise is increasing each day. On the upside, I have heard estimates that say the S&P 500 will go to 1,700 by the year’s end; but on the downside, some are predicting it will go below 1,400.

What you need to know for the first quarter of 2013 is that companies on the S&P 500 are expected to show negative corporate earnings growth of 0.6%. (Source: FactSet, April 5, 2013.) In the fourth quarter of 2012, companies reported corporate earnings growth of 4.2%, while in the third quarter, they saw a contraction.

Looking at the different sectors of the S&P 500, four out of 10 are expected to show negative growth. The rest are expected to show an increase in corporate earnings. The energy sector is projected to see the fastest decline in earnings by 4.3%, and a 7.9% improvement in corporate earnings is expected for the utilities sector.

For the first quarter, a significant number of the S&P 500 companies have issued warnings about their corporate earnings. Out of the 110 S&P 500 companies that provided guidance for first-quarter earnings, 86 companies, or 78%, issued negative guidance.

With all this said, should you sell what you have or buy more? At the very core, what you need to know is that earnings drive the stock market. If companies show better-than-expected earnings, the stock market rises; if earnings aren’t in line with expectations, the market falls.

Before making any decisions about what to do, investors must do their own research—because at the end of the day, it’s the investor who will lose money if things turn the opposite way.

Every quarter, the S&P 500 companies report their corporate earnings and the amount of noise increases. Investors must keep in mind that if they use proper investment management techniques, their portfolios can be saved, and they wouldn’t really have to worry about all the noise.

If investors believe—after conducting their research—that the key stock indices like the S&P 500 will decline, it may be a wise idea to go into capital preservation mode. Look at companies and asset classes that perform well when the stock markets aren’t doing great.

On the contrary, if investors think stock markets are headed higher, then they can look for stocks that move faster than the overall market—at the very basic level, maybe look at stocks with higher betas.

Investing for the long run isn’t easy, and the noise sometimes makes it even more difficult. Investors should keep their eyes on their investment goals and continuously work to minimize their risk. Listening to the noise may just cause investors to take a wrong step, which could result in huge portfolio losses.

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