As of this commentary 75% of companies reporting earnings have beaten expectations providing a lift to the stock market and encouragement to investors. However, does this statistic suggest blue skies ahead or just a good job of corporate America managing earnings expectations?
There has been a fairly consistent pattern this earnings season: top line (revenue) comes in below expectation and is generally poor, while the bottom line (earnings) beats estimates due to cost cutting. The quality of earnings has been poor and does not build the case for a sustainable, self-reinforcing economy. Our economy is still being propped up by our Federal government and the Federal Reserve. The minor pullback that ended on July 10th, at the bottom of the recent trading range, coincided with the highest level of bearishness from individual investors since the bottom of the market in early March. This contrary indicator has probably reversed itself not that we find ourselves at the top end of the trading range.
While improving sentiment and fund flows into the stock market could push prices higher, current fundamentals suggest the most prudent course for investors is further caution. Volatility is here to stay and we suspect there will be a better opportunity to get aggressive on stocks in the future. In the meantime, attractive yields on high-quality corporate bonds are a great choice.