A Replay of the 1st Quarter? – Market Anticipating Another Good Quarter of Earnings


There’s anticipation that second quarter earnings will be better than expected.”

Jim Herrick (subscription required), Head Trader, Robert W. Baird

“We think people are gunning to the low side on where earnings should come in…. We think analysts have overdone it to the down side [on estimates].”

Ryan Detrick (subscription required), Chief Technical Strategist, Schaeffer’s Investment Research

“People have continued to underestimate the strength in the global economy, the weak US dollar and the share buybacks from the larger cap companies.”

Brian Rauscher (subscription required), Director Portfolio Strategy, Brown Brothers Harriman

I think the move up last week and today reflect Jim Herrick’s sentiment that the market is expecting earnings to beat expectations which will lead to another run up in stock prices – which would be a replay of the 1st quarter

Right now, the Dow and S&P are perched just, and I mean just, below their all time records seemingly coiled to spring right through to new records should earnings come in above expectations – which, in reality, seems to be expected. 

The Dow is about 26 points, less than 2/10ths of a percent, below its record close and the S&P 8 points, or a little more than 1/2 a percent.

Short interest has been rising as have index put/call ratios so nobody could say that the market is euphoric.  But it’s definitely optimistic heading into the 2nd quarter earnings season – which kicks off in earnest next Tuesday (7/17) when a bunch of big name companies like Intel, Johnson & Johnson, Merrill Lynch, Coke, Wells Fargo and Yahoo! will be reporting.

Earnings for the S&P 500 increased by double digits for 14 straight quarters from the 3Q 2003 through the end of last year.  The first quarter of this year, in which earnings increased by 7.9%, broke that streak.

Analysts are estimating 2nd quarter profits to be up 4.4%.

It’s worth mentioning that last year’s 2nd quarter will be a tough compare because earnings were up more than 15%.

The sectors that will be important to watch are: technology, energy and financials.

Tech shares have been on fire the last 5 or 6 weeks, led especially by Apple and Google.  They’ve been leading the market so it will be important for their earnings to be strong.

Energy has also been strong with oil prices continuing to hold over $70 a barrel.  Share prices have gone through the roof and energy companies will need to show strong earnings.

Finally, financials are always important.  We live in a high liquidity, paper money, economy and financial companies are able to skim off some of that liquidity when the system is pumping but get squeezed when it dries up.

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