Back to top

Do Earnings Justify Record Stock Market?

Read MoreHide Full Article

Friday, July 26, 2013

The stock market today will likely sustain the directionless and tentative mood of recent sessions. With the Q2 earnings season more than halfway through, investors seem to be scratching their heads to find earnings support for pushing stocks into record territory.
Having seen Q2 results from 59.2% of the market cap of the S&P 500 index as of this morning (261 S&P 500 companies have reported), we have a pretty good sense of how uninspiring this earnings season has turned out to be. One could spin the results as ‘not so bad relative to pre-season expectations’ and point to the new record tally of total earnings in the quarter and the pockets of strength from the likes of Ford (
(F - Free Report) ), Boeing ((BA - Free Report) ), Starbucks ((SBUX - Free Report) ), Facebook ((FB - Free Report) ) and others. But irrespective of professional spin on the earnings data, the fact remains that the earnings picture is weak and inconsistent with a market on the cusp of new all-time highs.
We have a busy calendar next week, with the Q2 earnings season starting to wind down (another 127 S&P 500 companies reporting next week) and top-tier economic data taking center stage. In addition to the FOMC meeting on Wednesday, we have the July non-farm payroll report on Friday and the Manufacturing ISM report on Thursday. The morning of the Fed announcement Wednesday afternoon, we will get the first read on Q2 GDP that is expected to show growth likely dropping to under +1%. The Fed seems to have stopped experimenting with its messaging strategy, but they may decide to ‘tweak’ the post-meeting statement to reflect the ‘Taper’ debate.
The market will likely take the sub-par Q2 GDP reading in the stride, taking it as guarantee of continued Fed support. The Fed has been going to great lengths lately to reassure that they plan to keep the Fed Funds rate at current levels for a very long time even when they start ‘Tapering’ the QE program sometime later this year. The Fed’s taper-is-not-tightening explanation appears to have worked, for now at least. This helped stall the ominous-looking uptrend in long-term interest rates and pushed the stock market even higher. Hard to envision this calm surviving the eventual ‘Taper’ announcement, whether it’s in September, October, or a later date.
The more likely scenario is that ‘Taper’ will prompt investors to finally start paying more attention to real market fundamentals, particularly corporate earnings. They may not like what they see on the earnings front. But that’s down the road. For now, the party is on as investors seem content with what they see on the earnings front. I am no party pooper, but I find it hard to square the earnings picture emerging from Q2 results and company guidance with where the market’s current level.
Sheraz Mian
Director of Research

Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »

More from Zacks Ahead of Wall Street

You May Like