Wednesday, April 1, 2009

What Will Earnings Season Bring?

Earnings season has arrived! 

Too many bears have been pointing out how earnings are going to be bad, companies are going to miss their earnings and their stocks are going to plummet. Now I agree that earnings will be low, and that plenty of companies will miss their earnings. But I think their stocks will still go up. Why? Because as I have said many times, the stock market looks forward, not backwards. 

When the earnings come out, make sure to read the company's quarterly report because deep inside the report lies something more important than the earnings. Its the outlook the company gives for the next quarter and year. The economy is going to get better this year, the credit markets are thawing, and the government's efforts to jump start the economy will work. All these reasons, are why I think that when companies report their dismal earnings, they will add on that they think they have seen the worse and that their future outlook things are going to improve. Since the market looks forward, the future looking outlook will be more important than the lagging indicator of earnings. 

Case in point: Fed Ex. Fed Ex reported horrible earnings just a week ago. Their profit dropped 75% from the previous quarter and they missed their earnings by 15 cents a share. Yet the stock had close to a 5% gain that day, showing that no matter how bad earnings are, if the outlook is improving, then the stock is going to rise.

So while everyone is saying earnings are going to be bad, and they probably will, they are missing the main point. The outlook is what matters. I think most management teams are going to believe that the economic conditions are going to improve and that the credit markets are improving. They will raise their outlooks and this stock market rally is going to continue.

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