Don’s Outlook 7/23/2010
Earnings season is off to a strong start this quarter, but the results so far have failed to keep the stock market from stalling. Although the majority of companies are expected to post positive results and beat analysts’ expectations, investors are watching revenue numbers closely because they want to see positive guidance for upcoming quarters. So even if business leaders remain confident—the Conference Board CEO Confidence Index remains positive with a reading of 62—not all CEOs are putting their money where their mouths are and upgrading their outlooks, nor are they quick to hire new employees. This split most likely reflects the severity of the recession and anxiety over such unknowns as pending regulatory changes and this week’s European bank stress tests.
One of the weakest segments has been small business sentiment. A separate survey, the NFIB Small Business Optimism Index, fell to 89 in June from 92.2, reversing two month’s of gains. The survey reflects the reality of small businesses continuing to bear the brunt of the recession and being affected more than other enterprises by enduring aspects of the credit crunch. Small businesses create the bulk of new jobs, yet hiring expectations of small businesses have declined the most since October 2008.
Overall, the details from companies reporting thus far have been decent. During the first week of earnings, 47 companies had reported and 72 percent were better than expected. Among the positive results were bellwethers such as Alcoa (AA), Intel (INTC) and CSX (CSX), but only Intel was rewarded for beating analysts’ expectations, reflecting investors’ thirst for positive guidance. This week, after 25 percent of firms had reported results, the technology sector looks the strongest; 16 firms have beaten consensus estimates by 2.9 percent. These are the firms that have been guiding higher over the past two months, and this is one of the top sectors for actually improving its year-end guidance. Other sectors providing broad upward guidance include consumer discretionary and industrials.
However, it would appear that investors are reluctant to rely on the rear-view mirror, so to speak, and the progress made to date. Rather than focus on Q2 results, investors are focused on the road ahead or, in this case, the profit outlook for the second half of 2010 and the guidance for 2011. So far, guidance has been declining for the first time in several quarters. Yet with the economy still expected to grow 2.5 percent in 2010, the severity of this soft patch remains the key question.
Although leading economic indicators have peaked in the short term and economists have reduced their expectations for 2010 output—softer retail sales, slower inventory growth, and a larger trade deficit are part of the reason for the economic downgrade—there is little evidence that we are headed for another recession. In fact, industrial surveys performed by UBS Research Department, a leader in proprietary company research, show end-markets in various stages of recovery. Businesses tied to industrial activity and inventory restocking have shown the most improvement, while late-cycle industries such as aerospace or gas pipelines that rely on capital investment have been slow to turn around. More important, these surveys have shown improvements in credit and financing for manufacturers and suppliers.
