With all the talk of green shoots and hopeful expectations, the reality is companies must begin to report better earnings if we expect equity rallies to continue forward. Hope and expectation are all good and fine, but reality must match real-world company performance. July earnings will offer up some clues on what the rest for the year will look like.
With many companies last quarter exceeding beaten-down expectations, one can understand how investors have taken on more risk assuming the worst is behind us. But gloomy analysts will raise the bar as the recovery gains traction; its going to get harder to surprise on the upside. If earnings do not accelerate the equity rally we have seen thus far is too much too soon and overanxious speculation is the recipe for a market correction.
As July brings our first wave of company earnings, watch to see if expectations are met. And look carefully at company guidance for indications of sentiment from company executives about the future prospects for growth.
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Sure they will all say the future is uncertain and caution is warranted (what else are they going to say?) but once you look past that see if they highlight any other issues. Executives will give clues and if you listen carefully, you'll gain insight. But you have to listen carefully.
Green shoots are all theoretical until they translates into real profits and earnings growth. In the end, equity and debt markets alike require solvent conditions and fertile economic soil to provide opportunity for profit expansion.
Watch to see if companies see any hope on the horizon or forecast gloom. Their statements will give a good indication of how far along we've come as markets try to recover from this financial meltdown.
Two companies to watch for clues about the recovery in earnings include:
- Alcoa (reports July 8) . Will provide a view in to metals demand, industrial output.
- General Electric (reports July 17) . The company has a large exposure to financials as well as all industrials business. Its earnings should illuminate current conditions in a fairly broad portion of the economy.