3 Things I'm Watching For This Earnings Season

The Following Is An Excerpt From Special Report

The S&P 500 has gone virtually nowhere this year as it pauses to digest last year’s healthy rally. At first blush, this might not be a healthy headline (to see the market flat or slightly positive for the year), but it is very healthy because that is exactly how healthy markets behave:

  1. Stocks Trend
  2. Build a Base (consolidate the move)
  3. Resume The Trend (Breakout of the base and resume the prior trend – up or down).

This process unfolds in both up and down markets. There is an old saying on Wall Street, “Stocks take the stairs up and the elevator down.” Right now the market is simply basing and that is exactly what you want to see as investors wait for more “data” to be released.

The Fed (& The Market) Remain Data Dependent

Fundamentally,  the world is waiting to see what the Fed is going to do next. The Fed has told us (several times) that they remain data dependent and that Q1 data remains tepid at best. So far, the economy (Main St) is following their script perfectly. During Q1 2015, we saw a series of weaker-than-expected economic data points and now the world is looking at corporate earnings to gauge the health of the economy.
One of the most important “take-aways” that jumped out at us during the last Fed meeting was when Dr. Yellen told us (market participants) to interpret the data because that is exactly what the Fed is going to do. Right now, on aggregate, U.S. economic data remains “challenging” at best (to put it nicely) and that suggests the Fed will likely hold off on raising rates anytime soon. Remember the Fed is led by doves and so far they continue to err on the side of easy money -whenever possible. Actually, Dr. Bernanke (The first Fed Chairman to turn blogger), made his case that rates should stay at/near zero because of secular stagnation (a fancy economic term that simply means the economy is stagnating, not growing). Also keep in mind that the Fed has a dual mandate: keep the economic engine running smoothly and keep inflation near 2%. Right now they are failing on both fronts: the economy is barely growing (many people believe GDP was negative during Q1) and deflation remains more of a threat than inflation.

Three Things I’m Looking For this Earnings Season

Earnings season officially began on Wednesday when Alcoa (AA) reported Q1 earnings. Alcoa gapped down nearly -4% today which is not a healthy start to earnings season. Over the next few weeks, as we make our way through the bulk of earnings, I’m watching for three things:

  1. What the actual numbers are compared to Q1 2014 (I’m a big fan of growth)
  2. How the numbers are compared to estimates
  3. How the market and each stock (in my universe of institutional quality liquid/leading stocks) reacts to earnings

What Does This Mean For You?

Technically, the market remains “range-bound” as investors continue to look at incoming “data” for signs of what the Fed’s next move will be. From where I sit, the “data” suggests the Fed will continue their “easy money” path (keep rates very low or engage in QE4 – if conditions deteriorate)  for the foreseeable future (which should be bullish for stocks) – Until the “Data” improves, of course.  Stay tuned, it’s never a dull moment on Wall Street.

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