Don’t Ignore the Message of the Market
June 22, 2018
Once again we find ourselves on the cusp of earnings season, and current expectations are through the roof.
The market will have the burden of clearing those higher expectations and delivering on guidance, but I suspect the results will keep the indices elevated while also keeping valuations intact. Earnings news will be a great reprieve for investors from all the headlines in D.C. and trade war concerns.
They will also be a reminder of America’s economic might and momentum.
No one expects the same results as the first quarter, which saw S&P 500 revenue climb more than 8% and earnings more than 26%. Still, the bar is set pretty high.
Look for those names that can’t beat or offer robust guidance to pay a heavy price. And even when it seems like all the boxes are checked in the right way there could be some hesitation with initial market reaction.
Case in point: After the bell on Tuesday, Oracle (ORCL) beat and provided solid guidance, but its shares were still only slightly higher the following morning. At the same time, FedEx (FDX), which also beat but offered mixed guidance, was down in Tuesday’s after-hours trading.
Of course, before we get to the actual earnings releases we will start to receive earnings warnings over the next few weeks. I suspect these will be fairly telling of what to expect over the next couple of months — in fact, we got a warning from Red Hat (RHT) last night.
The market is dicey right now, but we’re seeing a lot of strong trends emerging. I expect these will continue until the reporting cycle begins, which will be the ultimate period of hit or miss with winners edging higher and the losers taking a big hit.
The biggest plus for investors and the stock market right now is the economic backdrop that can only be derailed by a wayward Federal Reserve or an asteroid that tilts the Earth’s axis.
Still, I want you to focus on the fundamentals, although that doesn’t mean you should ignore the message of the market. Right now, that message is uncertainty ahead of trade tensions, earnings season and general angst, also known as the fear of Murphy’s Law.
The good news is that we have learned to buy these kinds of dips before. And the Federal Reserve just said the banks could survive Armageddon, so really, why worry?
Consumer stocks are still killing it with a stealth rally, even as tech grabs the headlines because of billion-dollar merges and new record highs. I know the experts are worried about higher gas prices and the spike in products from trade negotiations and tariffs, but I think the warning is currently overdone. The fact is that the economic momentum is substantially ahead of those fears.
Forget what the experts are saying, people are spending money at brick-and-mortar stores. Those companies that have survived and are figuring it out have seen their shares even dwarf Amazon (AMZN) and Netflix (NFLX) lately.
I’ve been impressed to see some of the bounces here. Quite a few retail names are up more than 100% from their 52-week lows, including Macy’s (M), Kohl’s (KSS), Foot Locker (FL) and Restoration Hardware (RH).
In addition, there are a lot of deeply oversold names that look compelling. On that note, choose carefully. I’m on the lookout and ready to pounce when the right opportunity presents itself.