Will Q3 Earnings Slow the Rally?

I have been prepared for a market correction for a while now, but we have yet to get one. The rally off of the March lows has reached +61% and the momentum continues to be strong. Will it continue even as companies report their third quarter earnings?

Nobody can know for sure, but over the years we have often seen a “buy on the rumor, sell on the news” mentality on Wall Street, especially during earnings season. Stocks ramp up heading into reporting season, only to fall after the news of solid results actually comes out. A similar phenomenon could certainly happen this quarter and as a result I will be carefully watching both what the numbers are, but also how the market reacts to them.

If stocks sell off even after companies post in-line or slightly better than expected earnings, such market action could be the first sign that a long overdue correction in stock prices is on the horizon. In fact, we might already be seeing this. Tuesday morning, Johnson and Johnson (JNJ) reported earnings seven cents ahead of estimates, but the stock is trading down in premarket trading. Will that be the start of a trend, or simply an aberration? We will have to wait and see.

Comments

[markfl:]

I think you are missing the point. It's all about sales and top line revenue. There all practical limits to what can be obtained with bottom line cost cuts. It is all about who are the dominant players in their industry, and who is generating sales at the expense of competitors; it is also about which sectors are best positioned to perform well and are undervalued. Place your bets.

Oct 13 12:21 PM

[Victor84:]

There may be a correction on better than expected earnings, but that would appear to be a decent buying opportunity. If the past months have taught us anything, behind the scenes, there seems to be a lot of momentum promoting a synchronized global recovery. With the dollar losing value, liquidity levels either normal or improving on most fronts, interest rates at a low for the foreseeable future, it's hard to imagine another panicked flight to safety.

From a value perspective, small caps, European companies, and corporate bonds seem attractively priced, absent another recession.

Oct 13 12:35 PM

[User 344476:]

Earnings beat but revenue missed so I'm not sure JNJ is a good example.

Oct 13 01:20 PM

[Adonis:]

The 2 biggest factors right now that will give the market another boost, are top line (revenue) growth and lowering unemployment rate. When those two things happen, you better be invested. Right now we don't care about cost cutting to meet earnings expectations.

Oct 13 01:27 PM

[Wisdom vs. ...:]

US sales down 8.1%, APAC up 5.0%. IMO, bad enough to ignore earnings

INTC beat EPS and Rev and guided up, doubt there will be an immediate bloodbath, but tech might pop

Oct 13 04:22 PM

[Tom Armistead:]

Many companies took very strong action to control costs. Because there will be a delay in hiring back the laid off workers while revenue increases, they will leverage the expense reduction and show improved margins and EPS.

As long as the revenue reductions are consistent with what is going on in their industry and they are not losing market share any of these companies will be worth looking at.

The pundits have been very active in pushing this top line idea, so the market may oblige with knee jerk reactions, creating buying opportunities.

In JNJ's case they had two major drugs come off patent and get generic competition and the reduction in revenue was hardly a surprise to anyone who follows the stock. JNJ reduced their expenses accordingly well in advance of the reduced revenue.

Oct 13 10:02 PM