Earnings, Earnings, and more Earnings. After months of volatility fueled by a slowdown in China, world growth issues, and uncertain Fed policy, we are now beginning to understand how these issues have truly affected corporate earnings. At the end of the day, earnings are what truly drive stock prices and not the daily fodder. Expect volatility to continue through October as Wall Street combs through a rash of earnings reports yet to be disclosed en masse. Stock picking is likely to become more valuable as the challenging economic conditions are likely to separate the strong management teams from the chaff.
Earnings expectations have been materially reduced over the last few months and perhaps the pessimism has set the bar low enough where earnings could be a relief to the market. Investors that may have sold based on the negative earnings rumors in August and September, may return to buy if earnings prove positive. Earnings still may likely be lackluster, impacted by slow global growth conditions which have been clearly led by the energy/commodity sectors. We anticipate this and understand that much of this negativity is reflected in stock prices. Earnings and outlooks from corporate America may not be as bad as the daily pessimistic views expect as early positive reports from firms such as Nike paint a more solid picture.
The direction of the market for the remainder of the year may very well be determined in the next few weeks. Not only are the actual earnings numbers important to the future direction of the equity markets but also the tone exported from corporate America will also be critical. If all this isn’t enough, brace yourself for yet another Fed meeting to discuss the direction of interest rates.
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