What I’m Discovering Hidden Within 2Q Earnings Reports

Another day, another record for the S&P 500 and Dow Jones Industrial Average. The upward move has been a blessing for the past four weeks, and there will be more gains to come.

The key is that you do not want to bet against Dow theory or against the trend. The Dow Jones Transportation Average, shown by the red candlesticks in the chart below, is also confirming the upward move in the Dow industrials, represented by the green line, based on my technical analysis.

Chart courtesy of www.StockCharts.com

Yet, everything on the surface looks great. Of course, you can thank the Federal Reserve for much of that. The problem that I continue to see is the lack of any reasonable revenue growth so early on in the second-quarter earnings season.

Recall my previous commentary when I questioned the lack of revenue growth at some of the major technology heavyweights. The disappointing results from tech companies continue.

Google Inc. (NASDAQ/GOOG) released what was a big disappointment given that the market thought a strong report could have driven this momentum stock to test $1,000. This didn’t happen, as the company reported a major shortfall in its earnings—$9.56 versus the $10.78 estimate.

Likewise, Microsoft Corporation (NASDAQ/MSFT) reported a horrible shortfall in its earnings—$0.52 versus the $0.75 estimate. And the company’s revenue growth fell short.

Do you notice the trend?

The reality is that corporate America is failing to deliver any reasonable revenue growth that would make me more confident toward the economy and corporate growth.

And to make matters worse, General Electric Company (NYSE/GE), which is one of the most diversified companies in the world and widely regarded as a key benchmark, produced what I feel was a pitiful second quarter, especially for revenue growth.

I’m not even going to discuss the earnings. The fact is that General Electric (GE) saw its revenues contract four percent year-over-year. The company talks about the fact that six of the seven businesses in its core industrial segment reported higher profits, yet the overall revenue from this segment fell two percent year-over-year.

I’m just having a problem with the absence of revenue growth—the GE results confirmed this absence. Even as you look forward, GE is estimated to see revenue growth contract 0.1% this year and grow a weary 1.8% next year, according to estimates from Thomson Financial.

So while everyone talks about how roughly 70% of S&P 500 companies have beaten earnings per share (EPS) estimates, the reality is that the expectations were reduced by Wall Street.

Recognizing the weak revenue growth, you can now understand why earnings are really not that great.

Yet despite this, the stock market continues to ring in record after record due to the lack of any alternative investment. So enjoy the ride, but know that America is not as sound as its surface shows.

This article What I’m Discovering Hidden Within 2Q Earnings Reports was originally published at Investment Contrarians