All About Earnings

• Currency Investing

Well the second quarter has just come to an end and everyone on The Street is anxious to see what the results were. According to Bloomberg, stock prices in the second quarter had rebounded sharply from the previous quarter and stock indices were up the most for a quarter since 1998. Of course much of this has to do with the fact that the first quarter was one of the worst for stocks in history, but let's not ruin a good story for the want of a few facts. Still the question remains, will the market continue to rise?

In order to see if this market has legs and can continue, we must first take look at what has been causing it to rise in the first place. Quite frankly, the only things causing this market to move up are the hope and prayer that second quarter earnings aren't going to be absolutely atrocious!

As Bob noted in a blog last week, there's a good probability that there won't be enough economic data this summer to send the markets significantly higher or lower. This is going to turn the focus back onto individual companies and their earnings.  And the dreaded green shoots-will there be signs of life???

Here's what the market needs to see out of corporate earnings in order to sustain these levels and go higher:

1.       No more "well, it could be worse" rhetoric. The market needs to see that there are signs of recovery on the horizon. Less bad no longer equals good. Companies need to provide somewhat positive guidance for Q3 and beyond.

2.       Have corporate layoffs allowed companies to reduce their costs enough to begin to return to profitability? Or is more job loss expected? Obviously, more jobs lost mean more difficulty for the economy in general, but this could allow companies to operate "leaner and meaner" to eke out profits.

3.       The overall trend in earnings numbers needs to pick up, meaning that companies had better start beating some of the low-ball numbers the analysts have thrown out. The bar has been set very low for these companies so any misses in earnings will be seen as very bearish.

4.       Green shoots had better not turn out to be weeds! Much has been made of the government stimulus package and how it is going to affect some companies more than others. Those who stand to benefit had better have a positive plan on how this is going to impact their earnings going forward. 

5.       No more throwing the baby out with the bathwater. Today, Non-Farm payrolls came in at 467,000, worse than 363,000 analyst consensus. Maybe it's time for these guys to stop guessing at what's going to happen in the economy and start turning their attention back to stocks. There are going to be some winners and some losers come earnings season, and it's time for the market to recognize those companies that are doing well. 

As you can see, there is a lot riding on this corporate earnings season and the outlook right now appears to be pretty bleak. If corporate earnings can show signs of life, and companies are beginning to turn it around, then this could stabilize the markets for the next push higher.

If, on the other hand, earnings come in worse than expected, then all the rhetoric and catch phrases for economic recovery won't amount to anything. Should the latter occur, keep an eye on the US dollar (UUP) and Japanese yen (FXY), as the flight to safety trade returns and currency investors pour out of the riskier currencies and return to the dollar and yen. We're already seeing signs of it today with the poor Non-Farm payrolls numbers in the early session.

So earnings kick off next week with Alcoa (AA). Let's hope that it gets started on a positive note, otherwise it could turn out to be a very long summer!