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We’re pretty sure that EVERY earnings season gets described as the most important earning season in a long time, but hey, maybe this one really is.Nicholas Colas of CovnergEx offers his explanation for why this one is such a huge deal:
It is no exaggeration to say that we are facing the most important U.S. earnings reporting season since the March 2009 stock market lows. Here’s my logic for that claim:
• Monetary policy headwinds mount. Central banks around the world, including the Federal Reserve in the U.S., want to remove liquidity from the global economy. Some are further along than others, and yes, the Fed is bringing up the rear on these actions. But the economic indicators that monetary policymakers most closely watch – inflation and employment growth – are flashing yellow and central bankers the world over know they have to respond. Easy money policies will lurch towards more neutral positions in the coming months, putting a real headwind in the face of financial assets such as stocks.
• Domestic stocks have to reprove their relevance to investors. U.S. stocks have recovered much of their losses since 2007, and some small cap indices – think the Russell 2000 or the S&P 600 Small Cap – are very close to breaking through their best 2007 levels. At the same time, other asset classes such as precious metals and oil, have done much better. That has sucked a lot of interest, and money flows, away from stocks. The result has been a significant decline in stock market volumes in the U.S., even as equity prices performed heroically after the Japanese double tragedy and Libyan revolution last month.
• Revenues will move to the fore. Profit margins in the U.S. have rebounded smartly from their lows two years ago on the back of cost cutting and large scale layoffs. That’s a cyclical one-trick pony whose time has come and gone, however. Now, investors want to see the top of the income statement kick into gear – revenue growth needs to power the next stage of the market’s rally.