Earnings Beats All About Expectations

To-date, second quarter earnings reports have looked pretty good, with a little over 200 of the 500 S&P 500 stocks reporting so far, about 75% have beaten analyst expectations for earnings, and about 58% have beaten analyst expectations for revenues.  Sounds good right?  Not if we dig a little deeper.  Analysts have been slashing their estimates for second quarter earnings, and for the remainder of 2013, including many cuts that happened just days before companies have reported their numbers.  So, while it has been true that 75% of companies reporting have beaten estimates, they are beating estimates that were just slashed.  If we compare their reported numbers with the previous analyst estimates, before the latest cuts, the picture becomes a lot more pessimistic.  Indeed, even with the apparent positive results (75% beating on earnings), the average quarter sees about 60% of all companies reporting showing better than expected results, so the 75% we have seen to-date is not really all that much better than the average quarter’s results.

We will only see between 1% and 3% growth this quarter, which is anemic at best.  The second half of the year looks to be worse, especially given the Fed’s intention to taper their bond buying.  The current expectation is that the Fed will reduce their bond buying to $65 billion per month in September from the current $85 billion, with further cuts to come.  Interest rates are already climbing in anticipation of Fed tapering, and they should continue to rise, most likely at a faster pace, as the Fed actually reduces bond purchases.  Higher rates will not help the economy, which is not growing well as it is.  GDP growth was only 1.8% annualized during the first quarter, and will likely be lower in the second, third and fourth quarters, as the sequester cuts, and the impact of Fed tapering take hold.

My position remains the same – stocks are overpriced and vulnerable to a substantial correction.  I continue to hold cash and will implement my reinvestment strategy, once we see a sizable correction.

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