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CNBC.com
A cursory look at quarterly earnings this month suggests corporate America is regaining its foothold and ready to run again. But a look at the stock market's reaction indicates otherwise.
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Photo: Oliver Quillia for CNBC.com A trader at the New York Stock Exchange. |
So goes the dichotomy of third-quarter earnings, in which positive surprises have outweighed the negative by about 4 to 1 though stock gains have been muted.
In fact, since the Dow crossed 10,000 on Oct. 14, stocks have done almost nothing despite a flurry of beats from some of Wall Street's biggest names.
Investors' reaction, in fact, has been decidedly undecisive to all the seemingly good news.
"The overall market really seems fatigued at this point in the rally," says Gary Flam, portfolio manager at Bel Air Investment Advisors in Los Angeles. "The key question is, is this just a pause because solid earnings were expected and then we take off from here, or has the market petered out and we're due for a pullback?"
That's just one of the issues to consider as these five trends seem clear from the halfway point in a robust earnings season:
1. Things Aren't That Bad
If there's one thing that inspires near-unanimous agreement in the market, it's that the worst is over, especially compared to the horrid state in which Wall Street found itself a year ago.
That's been reflected in earnings such as Friday's spectacular report from Microsoft [MSFT
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] as well as other sound beats from market titans such as JPMorgan Chase [JPM
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], 3M [MMM
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] and Caterpillar [CAT
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], each in its own way a gauge for how well some of the most beaten-down areas have rebounded since the depths of the financial crisis.
"The move in Microsoft is of the magnitude that we haven't seen in a couple years," Art Hogan, managing director of Jefferies, told CNBC. "This is significant news."
That the market as a whole hasn't done cartwheels over the moves isn't necessarily worrisome to some experts. Perhaps the market has just taken a healthy pause after a more than 50 percent runup in the past seven months, a healthy alternative to a major selloff that earnings disappointment could have engendered.
"I don't think it's a bad thing for the markets to take a breather here," says Tom Higgins, chief economist at Payden & Rygel in Los Angeles. "This is good for the market at this point."
2. Things Aren't That Good, Either
The primary indication most market pros sought from this season was a growth in revenue—the "top line"—rather than merely profit driven by cost cutting to the bottom line. The latter phenomenon was almost solely responsible for powering second-quarter earnings, where upside surprises beat the downside 3 to 1.
They got what they were looking for, but to varying degrees.
In fact, in some cases strong top-line growth wasn't even good enough. Goldman Sachs [GS
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] was the poster child for a firm posting powerful revenue gains that still disappointed because analysts didn't like where the growth came from.
"What we wanted to see going forward is organic earnings growth driven by core businesses," Higgins says. "If you take financials for example, (they gained with) strong trading activity, which is fine in the short run. In the long term you want to see banks increasing lending and have that driving profitability. That's where they should be making their bread and butter, not trading and rising asset prices."
Moreover, while most of the big names topped expectations, the overall picture for the industry was mediocre.
Of 39 banks sampled by Keefe, Bruyette & Woods, 19 banks beat, 19 missed and one hit—hardly numbers indicative of a strong turnaround.
The results, KBW said in a research note, "indicates the great disparity among (quarterly) earnings results."
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