Thursday, July 18, 2013

Earnings Season Update

Using a baseball analogy, this critical Q2 earnings season is only in the second inning.  From my point of view, earnings have been disappointing, but the "market" has taken a different view so far...

Here is a link to an article by Sheraz Mian, Director of Research at Zacks:
Q2 Earnings Season Update from Zacks

This is an excerpt:

"There is not much growth outside of Finance, with the composite Q2 earnings growth rate for the S&P 500 (combining the 76 reports that have come out with the 424 still to come) currently at +1.6%. Excluding Finance, the composite Q2 earnings growth for the S&P 500 drops to a decline -3.5%. The Technology sector is a big drag on earnings growth, with total earnings for the sector expected to be down -7.8%."

So in essence, reporting so far has been dominated by the Finance Sector, who not unexpectedly reported good earnings. (A lot of their earnings has to do with estimates of the value of loan portfolios and financial transactions that may be completely independent of corporate profits in other sectors.)  I still think Financials are overpriced and Financials (Banks) is my least favorite sector. Excluding Finance, things have not been so good and several "bellwether" companies have warned of upcoming "headwinds".

Rail traffic growth looks anemic and the AAII Sentiment Index, as well as many other indicators tells me that the North American economy is worse than what the market is indicating.  The global economy is much worse. I am still recommending caution when investing new funds. 

While I think that generally, many people are overvaluing the effect of FED stimulus, the economy seems to be steadily improving--albeit much slower than people would like and much slower than many on Wall Street are currently assuming.  Most companies are struggling to improve top line sales. Companies are running out of cost cutting programs--good for employment, but not as good for the stock market in the medium term.

Of the three possible strategies in the short run---buy, sell or hold...I definitely recommend the "hold" strategy at least for a little while longer as this earning seasons progresses.

This paper is for educational purposes and for the sake of discussion. It is not a sales presentation and not a recommendation or personal investment advice. Opinions provided are exclusively those of Wayne Strout and are not the opinions by any financial institution. All investing involves significant risk of loss and there is no proven method to eliminate that risk. No investment should be made without a complete due diligence process, fundamental analysis and a discussion with your personal financial advisor.