Soft Earnings, Strong Market

Earning season is coasting toward the finish line.

The final household name to announce is Wal-Mart. That report will hit the wire Thursday. If it’s anything like the rest of the first quarter earnings we’ve seen, there won’t be much to talk about.

Overall, first quarter results were a bore. No big surprises. We were expecting a lackluster earnings season, and that’s exactly what the market delivered…

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“So far this season, the spread between the percentage of companies raising guidance minus those lowering guidance has been -2.9 percentage points,” according to Bespoke Investment Group. “If it holds in negative territory, it will be the seventh straight quarter with a negative guidance spread.”

You can see from the chart that the spread’s not as negative as it has been over the past year. Bu the improvement doesn’t knock your socks off, either.

Let’s pause for a minute to appreciate what this means…

For almost two years, most public companies were expecting softer revenue and earnings. And for the most part, that’s what they’ve delivered. I told you last month that we would walk away from Q1 unimpressed thanks in part to crumby guidance.

In fact, leading up to earnings seasons, more than three-quarters of S&P 500 companies issued negative guidance. Those were the expectations—in black and white.

“Until we see some really catastrophic misses,” I wrote in early April, “it will remain business as usual. I doubt lumpy earnings will be the catalyst for a mammoth selloff.”

Yet here we are. We’re staring at seven straight quarters of wishy-washy guidance. Meanwhile, the broad market is up about 15% year-to-date. Since late summer 2011, the S&P 500 has returned nearly 40%. Had you bailed seven quarters ago, you would have missed a substantial chunk of this rally.

It’s clear that soft earnings guidance won’t be the trigger of significant move lower—at least not until the overall market narrative changes. We’re going to need to see a significant negative catalyst to accelerate a move that pushes lower than a routine pullback.

Right now, the market remains in melt-up mode while everyone from analysts to fund managers to everyday investors anticipates a correction of some magnitude. But you know the market doesn’t care what you or I or anyone else thinks…

Don’t fight the tape. Short squeezes are popping up all over my radar this week. Top-tickers are getting slaughtered left and right. Stay long. In this environment, stocks could continue to stair-step higher than anyone expects.

The Daily Reckoning