Earnings Season Outlook

So far today stocks are shrugging off the somewhat disappointing non-farm payrolls number. The U.S. lost another 85,000 jobs in December. The employment picture remains bleak, but there is reason to believe that we are at least reaching a point of equilibrium.
Of course that’s little comfort if you are one of the 7.2 million Americans without work.
Some analysts are concerned over the employment number. They worry that the stock market has priced in a strong economic recovery and the jobs numbers continue to say that the recovery will be slow. That would leave stock prices vulnerable to lower earnings.
I’m not so sure. Investors have certainly bid stocks up to some fairly lofty valuations. But so far, investors have been right. It’s been the analysts who have remained too pessimistic about earnings.
It will be interesting to see how the coming earnings season plays out. It’s hard to imagine that companies will beat Fourth Quarter earnings expectations as soundly as they did in the Third Quarter. I suspect we’ll see a majority of companies reporting "in line" with expectations. That should be considered good, but don’t expect investors to be forgiving. We’ll also need to hear some positive guidance.
*****If you want a reason to be optimistic about the coming earnings reports, have a look at financials. Banks have rallied strongly over the last few days, and even Meredith Whitney’s downgrade of Goldman Sachs (NYSE: GS) hasn’t slowed the sector’s rise.
It’s a common belief that financials lead the stock market. And even though we still can’t call the financial sector healthy, the strength we’re seeing ahead of earnings is a good sign.
We’ve gotten some decent news from retail about holiday sales. New smart-phones and net-books are helping the technology sector. Strong pricing should benefit commodity stocks. Homebuilder Lennar (NYSE:LEN) even posted a surprise profit last night.
On the downside, we probably can’t expect much from the manufacturing sector. And I’m not getting too excited about retail, either. Sure, holiday spending may have been good, but there’s no reason to think that trend will continue. And retail stocks are carrying some fairly optimistic valuations.
*****It may sound strange, but economic recovery in the U.S. is probably more dependent on China than any other single thing. China is practically carrying the global economy right now. You can bet that if China’s government wasn’t so committed to growth, stock prices would be a good deal lower than they are.
In fact, a weak earnings season might take the stock market down a little, but keep an eye on China. Yesterday, China made the first move at slowing the rate of bank lending. By selling bonds with a higher interest rate, China has effectively raised interest rates and made loans more expensive.
It’s a good move by China. With all the bluster that China is facing an imminent collapse due to aggressive lending, it’s a good move to address investors’ fears with a token rate hike. But let’s hope small actions are all that’s needed.
Of course, I’ll be discussing this in more detail during my upcoming video investment conference on China. It’s called China Inc.: Understanding China for Outstanding Profits and it airs on January 20, at 6 pm ET.
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