Broker Check

Earnings Season. Stimulant or Depressant?

After a goldilocks employment number released on Friday traders and investors seem to believe that the economy is not too hot or too cold and just about right for stock prices as the major averages posted a positive start to April. Recession fears are abating and most investors are taking the lead from CEOs in cyclical industries such as semiconductors that are talking sloppy numbers short term but future orders are building in a wide variety of end markets including 5G, gaming, cloud based infrastructure, and internet of things. The future optimism is holding the current mood of market participants.

Now we move into first quarter earnings season and many strategists are nervous that earnings will be a disappointment. Data Trek Research is looking for a negative 3.9% comp or comparison to last year’s first quarter. They point out that companies have been bringing down their numbers throughout the quarter. OK, so let’s assume they are correct. Is it not more important what companies and CEOs are saying about the next six to nine months versus their earnings compared to last year’s first quarter? I say yes and the stock market has shown advancing stock prices in recent weeks as many leading cyclical industries like the semis are trading higher on encouraging forecasts.

I understand that not all sectors will be positive and we will have to pay close attention to the conference calls to make sure fundamental indicators such as orders/backlog are building as companies plan for the second half of the year. And, I have talked a great deal about China recently and the trade talks must continue to be encouraging for our U.S based multi-nationals to trade higher from recent advances. Any change in tone could reverse the current optimism and quickly bring stock prices back 5% without any changes in economic or interest rate forecasts.

Therefore, I plan to focus on the earnings calendar and pay close attention to any deviations to company guidance and do my best to ascertain if their updates are supportive of higher stock prices or a depressant that needs to be addressed. The next three to four weeks will be very interesting to me as our major companies report and I expect will play a big part in determining what the second half of the year looks like. Let’s see what our CEOs say and not predetermine the outcome before hearing their plans and guidance.

Have a great week,

Roger N. Steed

April 8, 2019

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