This week starts off earnings season. The results will be scrutinized, analyzed and debated for signs of a real economic recovery.
How will companies measure up?
The Wall Street Journal suggests that some views of company profitability seem a bit off.
“At the moment, analysts expect companies in the S&P 500-stock index to earn nearly $73 a share, excluding one-time items, in 2010, up 35% from 2009,” reports the WSJ’s Mark Gongloff.
He says Wall Street is too optimistic… again. That could spell trouble.
Stock prices have started higher today nonetheless, building on yesterday’s stock market gains. Investors clearly think companies can live up to their expectations this time around. But that might be a mistake.
Forbes editor Steve Schaefer writes, “Tobias Levkovich, the chief U.S. equity strategist at Citigroup, warned in a recent note that shareholders are viewing analyst estimates as ‘beatable’ making it much harder for companies to blow away expectations compared with last earning season when a worried mood enabled many firms to issue pleasant surprises.”
That makes “sustainable” earnings seem far out of reach.
Earnings will be relying on the resilience of the U.S. consumer, but if demand has not climbed in the United States, will international demand be enough to keep earnings on the rise?
Maybe in some areas, like technology and commodities. The sheer number of new IPOs and merger deals, particularly in Asia, seems to support greater demand. But no one is sure if it will be enough.
MarketWatch’s Jonathan Burton reports, “As the fourth quarter gets under way, the overarching concern for stock-fund managers and investors is corporate earnings – or more to the point, the lack of robust sales to support earnings.”
In other words, disappointment may be on the way.
Burton continues, “The trouble is that stocks have been priced for a rapid and multiyear recovery that may not materialize.”
In this context, the current market rally may look like the last leg up before a big fall. With investor expectations high, and consumer demand low, the build-up to earnings season will inject a lot of volatility into the stock market. Expect some shocks along the way, but protect yourself with classic hedges like precious metals.
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