Why hasn’t earnings news driven stocks up?

The global equity markets fell over last week and again this Monday even though more than 50% of the companies who have now released earnings in the United States beat the street estimates. Disappointing profits from companies such as Motorola and Lucent Technologies helped feed the trend. Following on the “get bad news out early” theory, it is likely that the earnings story will only get better as we progress through this earnings season, but stock indexes may well not follow suit.

This week is the peak of the earnings season announcements for Wall Street. But with oil prices higher  again (near USD 49.00 per barrel), an OPEC meeting set for Sunday to discuss production quotas to maintain pricing, and violence in Iraq expected to build toward the end of the week as the US moves to have the first elections ever in a Middle East Muslim nation on the same Sunday, there may well be too much news to go around this week. We would expect that the negatives will dominate, creating a buying opportunity for those ready to take on the US Fed’s slow and measured interest rate hikes. Business news is not likely to get the same hype it would have, had these events not been going on. So why hasn’t the earnings news driven stocks up?

Well, from a business perspective, it seems that investors were expecting the recent correction based on the significant run up of stocks over October to December. Further, many believe that earnings deceleration is going to impact negatively is a big factor. In fact, earnings are expected to grow less than 8% in the first quarter of 2005, according to First Call forecasts, down  significantly from the 15% growth figures of late. Although earnings are in effect going down, we see it more from the perspective of getting back to a long- term sustainable level. It may be difficult to understand that less is better than more, but it is better to have slow and steady growth.

However, that theory often ends in some kind of drama, usually disaster. Feast and famine as a growth path of choice for an economy is not good. Slow and steady for an economy means no stupid spending, controlled inflation, planned and reasonable expectations, comfort, security and growth. We note that valuations remain favourable. The P/E on the DOW is only 17.28% and the yield now up to a staggering 3.15%. Excellent figures and with the economy solid, employment and earnings good, it is hard to come up with a reason for equities not to rise with improving corporate performance. The usual excuse of stagnant employment has faded, with critics reverting to the old favourite, debt ... both consumer and country.

We have discussed the debt circumstances at length in previous articles so we’ll leave this point at, the debt is in line when considering historical figures such as interest rate costs and debt as a percentage of income. What the markets will need to get focused to the future is a significant event. Everyone already believes the future is good, they are just waiting to be sure that something bad doesn’t happen in the near term. Thus, the markets seem susceptible to a positive shock. Should something dramatic happen that is positive, we would expect the stock index and investors to respond in the positive. Should something negative happen, we would expect the markets to hold pat, waiting for the positive shock to still happen.
Europe:

The US Dollar rose to a two-month high last Thursday against the euro as the greenback appreciation beyond $1.30 per euro. European government bonds declined after the European Central Bank Vice President announced economic growth would accelerate this year and inflation would slow to below 2%.

Looking Ahead:
It may well be a good time to buy into stocks, given the fall in equity pricing since the start of the year. Financial stocks look to do well as investors look to find a home for the increasing wealth which came out of 2004. At some point, the solid earnings being delivered by the corporations We do not see oil pricing having either a long term or detrimental effect on the economies, unless pricing goes total off the wall. Once it stays in the USD 50.00 per barrel trading range for US light sweet crude, we don’t have any real concerns.
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