Earnings Season Approaches: How Will the Market React?

It appears that the stock market will stagnate between now and the start of earnings season on Monday. After the sharp rally we saw last week, this is a good thing. Sentiment shifted from negative to positive quickly. And if the market can simply hold those gains, it’s a victory.

Alcoa (NYSE:AA) reports Monday. But then we don’t get another significant report until Thursday, with JP Morgan (NYSE:JPM). And that’s pretty much it.

The following week (July 18-22) is when earnings relay get underway.

In the meantime, employment data released tomorrow and Friday are the next major catalysts.

There’s virtually no enthusiasm for Friday’s NonFarm Payroll number. The market expects around 100,000 jobs were added in June. That’s obviously much lower than the numbers from even a couple months ago.

Given the recent weakness we’ve seen in economic data, 100,000 jobs might be a little optimistic. I expect we’ll see far fewer, but I’ve grown pretty pessimistic about the labor market.

As we’ve noted numerous times here in Daily Profit, U.S. corporations have adjusted their production rates for the current amount of demand. There is really no incentive to hire new employees and add to production levels.

Of course there are exceptions. Individual companies, like Google (Nasdaq:GOOG) or Boeing (NYSE:BA). But the totals are literally a drop in the bucket. And so long as individuals, banks and the government is working off debt, there’s no reason to expect a surge in employment.

China raised interest rates for the third time this year to fight inflation. Inflation is running at an annualized 5.5% rate, and some say it will accelerate to 6% when the June numbers come in.

China has also raise loan reserve requirements at banks to slow the flow of cash into the economy. But China is also a major victim of rising commodity prices, especially food. And I don’t think interest rates or reserve requirements will make people eat less.

But on the positive side, higher commodities prices haven’t slowed demand from China. And that’s a major positive for the global economy, especially emerging markets.

Say what you will about the International Energy Agency’s (IEA) coordinated release of strategic petroleum reserves, it succeeded in lowering oil and gasoline prices over the holiday weekend.

While oil prices (and oil stocks) have rebounded from recent lows, it seems some of the froth in the oil market has been removed. I would chalk this up to an understanding amongst traders that the IEA could easily act again.

So it’s not as easy (or safe) to be an oil bull. But given the string action from oil stocks, I have no problem being a bull on oil stocks.

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