Earnings Fail To Impress
Since gaining on some decent earnings reports and a bounce in oil prices, U.S. stocks have been choppy. Investors worry that the recession in the U.S. industrial sector may be spreading to the service sector, which accounts for about 80% of U.S. economic activity. For now, with the Dow Theory in the bearish camp, we are maintaining a defensive posture. As a partial hedge, our buy lists have 21% to 24% in a short-term bond fund.
December-quarter earnings reports have been better than the worst-case scenarios seen by some bears, with a higher-than-normal 71% of S&P 500 Index companies exceeding consensus expectations.
Still, fourth-quarter earnings for the S&P 500 are expected to be down 4.4% from the year-earlier quarter, according to Thomson Reuters. Projections now call for just 1.7% growth excluding the hard-hit energy sector. Revenue is expected to be down 3.7%, or up 0.9% excluding the energy sector.
Also, estimates for the first and second quarters face pressure because of mostly discouraging guidance from U.S. companies. First-quarter earnings are expected to be down 3.3% from the year-earlier quarter, or up 0.9% excluding energy, according to Thomson Reuters
The number of companies warning of a possible U.S. recession has risen sharply from year-earlier levels, as has the number cutting or freezing their capital spending in 2016. Indicators suggest the U.S. service sector continues to expand, but in January the ISM nonmanufacturing index suffered its biggest one-month decline since 2008.
Perhaps most important, the reaction to quarterly results has been discouraging. Shares of companies delivering better-than-expected results have enjoyed a smaller-than-normal bounce, and the major averages have moved mostly sideways since earnings-reporting season began.
From a Dow Theory perspective, the Jan. 20 closing lows of 15,766.74 in the Dow Industrials and 6,625.53 in the Dow Transports represent key points. A breakdown below those levels would reconfirm the bearish primary trend. If one or both averages can avoid a breakdown to new lows, the bullish camp might find some hope.
A cautious, defensive stance remains appropriate, but investors should continue to look for buying opportunities on a stock-by-stock basis. Among our recommendations that have rallied on solid quarterly results, C.H. Robinson ($65; CHRW) and Comcast ($58; CMCSa) represent top picks.