Energy, tech and housing continue to show some strength but financials and retailers are already showing signs of stress. So, what about all of the others? With earnings season kicking off this week, is Wall Street about to go "on sale?"
So much of our economy depends on the consumer, so look for second-quarter reports to focus on the health of the consumer. Traders will be looking to see if the rebounding consumer will now be the engine of "growth" vs. the massive cost-cutting efforts that have been the story for the past five years as the country and the world have navigated their way through financial crisis after financial crisis.
Remember that the massive buyback programs initiated during these times of such low rates in the end also help to boost per-share earnings – helping the "bottom line," so pay close attention to the growth part of the story – that will end up being the key to demonstrate the real health of the consumer and economy.
We have seen the disappointing commentary from the likes of Wal-Mart, Family Dollar, The Container Store, Rent-A-Center, Wells Fargo, Lumber Liquidators, Williams Sonoma, Ethan Allen and even Bed, Bath & Beyond.
Projections for the financial sector – a sector that has year-to-date underperformed – are down, starting with top-line revenues that are causing that "trickle-down effect" straight to the bottom line. Bank lending for business and personal is down. Businesses aren't borrowing to invest in projects and the consumer isn't going gang busters for mortgages. Remember: Spending is only as good as someone's income and with wage growth up only 1.9 percent after adjusting for that "non-existent" inflation that the government says does not exist, it leaves many to wonder: How much longer can the disconnect continue?
So much has been said lately of what we should expect, especially after the much weaker first quarter, which was impacted by an exhausted consumer and abnormally tough weather conditions. It's an argument that I still do not believe. Do they think if they say it enough times then it becomes the reality? I'm not buying it. Consumers do not stop purchases because it snowed or rained. So many purchases are done online that the consumer NEVER has to leave his house anyway — no matter what the weather is.
I conducted an experiment of my own: I shopped and banked online for everything my family and I needed for one month — food, clothing, shoes, new shutters for the house and a couple of wedding and baby gifts. We did not enter one brick-and-mortar building. Everything got delivered to our front door - Pea Pod for food, UPS for everything else and email confirms for any banking. If I needed a new stove – I could easily go to any number of websites and shop/compare and purchase and have it delivered as soon as the next day — never having to speak to a human being.
The result of my experiment? Weather had nothing to do with our purchasing power/spending habits or the ability to shop.
For the second quarter, analysts are projecting a 4 percent growth rate across the S&P 500. Clearly, some sectors will outperform, while others are sure to disappoint. Financials are at the top of that list of expected disappointment and the industry made sure to broadcast that last week in a number of articles that would hopefully "soften the blow." That allowed traders/investors to react prior to the announcement, which they did, sending that sector lower yet again. That's one part of the explanation for the weakness in the broader market suffered last week.
Look for energy to perform well as oil has been over $100/barrel for some time now. Look for tech to also remain fairly robust as demand for new technologies/computers/phones/pads/laptops/desktops remains apparently strong. That was evident when Intel raised its forecast due to "heightened demand" for personal computers.
Overall, I suspect that just like every other quarter, we will see about 75 percent of the S&P beat estimates. Funny how that happens quarter in and quarter out, but it is what it is. What always remains important during any earnings season is what companies say about the next quarter and the quarter after that along with WHERE they are seeing the demand. Is it here at home or is it abroad in distant lands? That will also provide a clue as to the health of the U.S. consumer.
By all accounts, the third and fourth quarters appear to be shaping up just fine, with current estimates at 9 percent and 10 percent, respectively. In the end, I do not expect investors to be disappointed with the overall tone and look for trader types to react to each individual "better than" or "worse than" expected report, resulting in action that may cause intraday volatility but should not necessarily affect the mindset of the long-term investor.
Commentary by Kenny Polcari, director of NYSE floor operations at O'Neil Securities. He is also a CNBC contributor, often appearing on "Power Lunch." Follow Kenny on Twitter @kennypolcari and visit him at kennypolcari.com.
Disclosure: The market commentary is the opinion of the author and is based on decades of industry and market experience; however no guarantee is made or implied with respect to these opinions. This commentary is not nor is it intended to be relied upon as authoritative or taken in substitution for the exercise of judgment. The comments noted herein should not be construed as an offer to sell or the solicitation of an offer to buy or sell any financial product, or an official statement or endorsement of O'Neil Securities or its affiliates.