Corporate Earnings Weakness Should Send You to These Equities

After the stock market closes today, benchmark stock Alcoa Inc. (AA) is set to report. Expected consensus-adjusted earnings are $0.06 a share, with revenues averaging $5.86 billion. That’s about flat with the comparable quarter.

Like many other benchmarks, Alcoa’s position has been drifting lower lately on slowing economic news, especially from China.

Also reporting is WD-40 Company (WDFC)—you probably have more than one of this company’s products in your garage. This dividend-paying lubricant company has been doing very well on the stock market since 2010 as investors sought earnings safety and yield. Earnings are expected to be flat with the comparable quarter on only a slight gain in revenues.

There isn’t a lot of double-digit growth out there, especially with large-cap, multinational corporations. So when the numbers get close, the stock market chases the positions. Johnson & Johnson (JNJ) is the perfect example of this.

I have to say that the stock market is holding itself together very well, considering the lack of earnings growth over the last several quarters. The system is very much a leading indicator—or perhaps, a leading gambler—on the prospect of earnings.

Institutional investors are still buying in this market and, at the same time, there have been plenty of withdrawals from the bond market. The stock market can still move higher from its current level if corporations provide an outlook of either earnings growth or stability, peppered with the expectation of improving revenues.

Companies are naturally very reluctant to make bold predictions regarding operations, since they want to avoid missing expectations. Instead, earnings forecasting is very much a game between corporations and the stock market.

Both Oracle Corporation (ORCL) and Apple Inc. (AAPL) tried to sweeten the attractiveness of their shares with big dividend increases. So far, it hasn’t worked.

The bottom half of the year (particularly the fourth quarter) is always the time when companies post their strongest quarters. The last few months have kind of been a “sell in May and go away” scenario—the stock market turned lower at the beginning of the last week of May.

If I had to guess, I’d say the stock market is likely to tread water until the end of the summer. Without question, Federal Reserve policy holds the keys to any trend. (See “Little Gain Now for Lots of Pain Later: Fed Policies Will Hold the Economy Down.”)

Clearly, the stock market is due for an extended break. A natural period of consolidation or correction would be a healthy development. If speculation regarding the end of quantitative easing was the reason for the market’s latest retrenchment, flat earnings and revenues could easily be the next reason.

This earnings season, I have very little in the way of expectations for outperformance. Global economic news has definitely provided weakness abroad in the second quarter, especially in China. That should be reflected in earnings.

Since the stock market remains a big hold, I have to reiterate my view that utilities are becoming more attractive for new positions.