Market Brief: Earnings-Low Expectations

Markets have been fixated of late on the daily comments of various Fed officials.  One will say that they favor ending quantitative easing (“QE”) sooner rather than later, and markets would likely have sold off for the day.  The next day, another would say that the decision on QE would be data dependent.  In response, markets would rise more often than not.  Because of this, the free markets course now seems dictated by a random statement by any number of central planners.  It’s the irony to top all ironies when you really think about it.

Let’s not forget what a free market is.  It is one where the individual dreams and desires of all of the individual participants are pursued.  It is those pursuits that determine prices, availability, demand, etc., for all goods and services.  Changing prices based on ramblings of central planners is not part of the definition.

Fortunately—or unfortunately depending on the results—earnings season is upon us, and investors will have some tangible corporate data to analyze.  Expectations are fairly low, so positive surprises could keep the rally intact.  And let’s not forget that the S&P 500 closed on Friday at a new all-time high.

While we only have one week’s worth of reports, which featured 29 S&P 500 component companies, there is a bit to work with.  So far, earnings growth is up about 0.7% on revenue growth of about -0.7%.  By any historical comparison, this is pretty weak growth.  Finance firms have shown strong results so far, and we will hear from quite a few of the big banks this week.  Technology is expected to show weakness.

So, are we witnessing a mid-cycle slowdown, or is the bull cycle nearing its end?  While no one knows for sure, we err on the side of a mid-cycle slowdown.  To be sure, broad analyst consensus points to faster growth after this reporting season is over.  In fact, for full year 2013, analysts are expecting record high earnings on growth of about 6%.

As with most things in investing, there is a good side and a bad side to this.  If companies are actually able to achieve the forecast growth, we will have confirmed that this was, indeed, just a mid-cycle slowdown and that growth is still in the cards.  The negative side of this equation is in expectations.  If we expect a second half rebound in earnings but don’t get it, markets could certainly face some pressure.

Please give us a call should you have any questions or concerns. Thank you for your continuing confidence and trust.


Edited remarks of Kane Cotton, CFA, Bellatore Financial, Inc.


Security First Advisors is a locally owned, independent, fee-based investment advisory firm located in Portland, Oregon offering comprehensive financial planning and money in transition services.