Corporate earnings in the U.S. have largely been overshadowed by ongoing concerns over public debt in the European continent. But if one takes the time to look past events overseas and focus on earnings numbers from U.S. firms, most have surprised on the upside.
What was a pretty negative perspective on the U.S. economy certainly seems to have changed particularly relative to the eurozone.
Despite all the epitaphs written about the U.S. economy, the country seems to be slowly but surely coming together again as we see relatively good numbers this quarter.
Companies such as Cisco and Google have reported not only surging revenue, but have also stuck their necks out with bullish predictions of healthy recovery.
The question now is on the future earnings trajectory for US companies. What should our expectations be for stock price movements relative to these earnings reports?
As is always the case, stock prices move relative to intrinsic value and the dynamics of market psychology. In other words, expectations of good or bad news are layered on top of the actual real value of a given company.
Earnings expectations in 2009 were quite negative given the rapid slowdown in global economic growth that decimated company balance sheets over the last two years.
However, with companies relentlessly reducing cost and slashing payrolls, it is not a surprise that earnings have come in on the high side.
Cost cutting is saving the day, but for how long?
Slashing cannot go on forever, and sooner or later, revenue growth will have to resume a key role in order for its stock price to march forward. Yes, this is where it gets difficult; is it really possible to increase top line growth in a challenging economy?
Current stock prices may already have factored in an increase in top line growth.
It's hard to say for sure however, particularly for beta-oriented companies, there's no doubt that some optimism is priced in to stock prices. For that reason, it is wise to be cautious.
Increasing positions in small-cap stocks, real estate investment trusts, and selected non-US assets may make sense as a cyclical recovery takes hold. These assets have rallied significantly in the past 12 months but they are still trading below historic norms on a relative basis.
Be prepared for the possibility of a significant market correction in more speculative positions that have skyrocketed in value in the past year.
High leverage assets that have rallied significantly should be carefully assessed as positions that are highly volatile could very well bear the brunt of any downturn.
These are assets that were bid up based on euphoric sentiment (remember the dotcom crash a decade ago?)
In times of market turmoil, it makes sense to reallocate your portfolio and take advantage of the shift in market dynamics. Reallocation and rebalancing is necessary when the market fluctuates.
Now is a perfect time to take a step back and find ways to reposition for the next phase in the market.
Michael A. Yoshikami, Ph.D., CFP®, is Founder, President, and Chief Investment Strategist of YCMNET Advisors, Inc., a registered investment advisory firm (www.ycmnet.com). He oversees all investment and research activities of YCMNET. He is a respected lecturer speaking frequently on market issues, tactical asset allocation, and investment strategy. Michael and YCMNET were ranked as one of the top 100 investment advisors in the United States for 2009 by Barrons. He appears regularly on CNBC and CNBC Asia and can be reached directly at email@example.com.