Will This Season Yield a Strong Earnings Harvest?

By C. Jonathan Camarda

The consensus on Wall Street seems to be that earnings expectations are low amidst low inflation and moderate economic growth. Many are anticipating third quarter earnings to be solid. The thought has been a rate hike will not occur in October and may make it beyond Decemeber without a rate rise, which leaves the tone somewhat “bullish”. As we move into the second half of October, we see nice bounces in the market since late September with the major average up over 7% over the last couple of weeks. However, the bigger trend is down since August 19th and this upmove should be interpreted—at this point—as an interim counter trend until proven otherwise. In other words, it may be just a bounce in the correction, but if we see a strong earnings season, this may provide just the momentum to change the current trend over the last two months and put us fully back in bull mode.

As we delve deeper into the sector evaluation, we’re a bit disconcerted to see the recent underperformance of financials, which may point to relative weakness in the large banks. Healthcare and utilities have also stumbled the last few weeks. The market’s strong points have recently been consumer services (think BMW-Tiffany) and technologies. We’re also concerned with the underperformance in home building and retail since these represent a very high percentage of the economic picture for much of middle class America. Nonetheless, the October bounce has been holding up well and shows much promise.

Globally, it is interesting to watch the situation of the U.S. and Russia becoming at loggerheads over Syria—perhaps becoming an ominous cloud brewing over a backdrop of global economic growth concerns. However, the news out of China may indicate that the problems there may not be as severe as recently thought. There is no doubt the Fed “balking” at raising rates in September (and probably in October) has helped—though it should be mentioned there have been noises about a December hike, which might not be a bad sign.

Finally, we are now in the thick of earnings season. The numbers will be plentiful over the next few weeks, and we should have a better vision of the economic picture here at home as well as abroad. If higher numbers are experienced by the multinationals (large exporting blue chip stocks), then this trend reversal to the upside should find legs and eventually a “sled” (a Santa Claus rally!). Yes, it’s not even Halloween yet, but if the numbers are right, you may just see ol’ Jack O’Lantern downing some egg nog a little early this year! Stay tuned.

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