EmailGeneral Electric could be the poster boy for this quarter's earnings season. The company reported operating earnings a penny ahead of expectations, but revenue was lower than forecast on a paltry 2.5% year-over-year revenue gain.
Those numbers are consistent with the overall trends. Most companies are beating estimates, as always happens given the way the game is played. Estimates have been lowered enough such that a little over 60% of companies have beaten forecasts. The percentage of "beats" is running a bit behind most quarters, however.
Revenue weakness has been more widespread. Yesterday after the close Microsoft joined the list of major companies with soft revenue growth with a 4% year-over-year gain that was below forecasts (although the stock is trading higher pre-market because of better-than-expected profits).
The overall weak revenue growth is disconcerting because profit growth can't continue strong if revenue growth is weak. Profit margins are at historically high levels, and companies are squeezing margins as much as they can, but that is not a long-term recipe for strong profit growth. There also needs to be more revenue growth for profits to rise through 2013.
The market is counting on another round of Fed quantitative easing to help boost the economy and spur some of that revenue growth, but that remains a dubious expectation given weak economic trends.
S&P futures indicate a down open of about nine points. This is to probably just due to some defensive positioning after a good week for the market. The S&P 500 is up 20 points on the week so far.
There are also more stories out of Europe that could be having a negative impact. Spain is back on the radar after large protests over economic measures and a government 10-year yield that is now 7.14%, well above the 7% level that usually generates market histrionics. Greece and Italy lurk in the background.
The stock market often rallies at some point during earnings reports. This often takes the form of a relief rally that earnings weren't worse than expected, and sometimes because of strong earnings. But the market will soon be looking past these earnings reports. Expectations for another round of quantitative easing will then be of major importance, but weak economic trends and US fiscal issues will also re-emerge to weigh on the markets.
There is still a long way to go this summer. Don't get trapped into thinking the risks are gone simply because many stock market participants are talking about potential Fed action as a backstop to any market decline. It isn't in the Fed's mandate to protect money managers from a bad quarter. (That's another story we won't get into right here.)
Founder and Chairman, Briefing.com
