Generating an opinion about the future can be a tall order. After all, there are a lot of separate factors that go into such an analysis, and many of those factors can contradict each other. New word out from Kristina Hooper at Invesco, meanwhile, suggests that one key point to look for with this earnings season's report boils down to one simple point: optimism.
Keep on the Sunny Side of Stocks
Yes, like the classic Mother Maybelle Carter tune admonished, look for stocks that are keeping on the sunny side of life. It's actually the “most important” thing that Hooper is looking for in the midst of the various earnings reports set to emerge this season.
Why is optimism so important to Hooper here? Basically, thanks to the signing of the first major trade deal between the US and China, conditions are pretty ripe for optimism to appear. With the trade war dialed down substantially, it's opening up a serious opportunity for two of the world's largest markets to start conducting more trade, which is a great opportunity.
More specifically, Hooper looks for greater capital expenditure plans as one of the biggest drags on the market boils off and departs the field. Thus, businesses that are openly expressing optimism going forward have some plans in this vein and are ready to at least start trying to make hay while the sun shines, to use the cliché.
A Dark Cloud on the Sunny Side
Yet even Hooper recognizes that not everybody is going to be able to take advantage here. The trade deal is a major development, and it should help bolster corporate profits if for no other reason than the negative potential is decreased. Hooper notes that there's still quite a bit of trouble left to be addressed as many of the biggest sticking points between the two major market powers remain in play.
Hooper also expects that this earnings season won't be particularly modified by the trade war news, as most companies will either meet or slightly exceed estimates. This is perfectly reasonable given that companies are presenting earnings results now, and this news is taking place two weeks after the last quarter ended for many firms. This is leaving Hooper to expect less-than-stellar results going forward.
Hooper is also calling for the S&P 500 to grow in the high-single-percent range—somewhere around six to nine percent, say—and given that the index is currently up two percent with just two weeks in, Hooper's bet is a fairly safe one.
Looking For the Sunny Side is a Tricky Business
Hooper, of course, has the right of it. The only modification that businesses will enjoy for this quarter is holiday sales figures, where relevant, and not everybody even has those. So the news of at least a de-escalated trade war with phase one conclusions won't deliver a lot of positive impact one way or another on a concluded quarter's figures.
Yet Hooper also has the right of it in that, if we're not hearing optimism out of companies now, we're not likely to hear optimism at all. The news of a phase one trade deal conclusion pulls a lot of uncertainty out of the mix. Sure, some is still involved, but it's a whole lot less than the constant back-and-forth of tariff, counter tariff, and vague threat that we've been treated to for the last few months now. What's left is a lot of details. Brass tacks. Crucial, vital brass tacks, of course, but the basic outlines of a trade deal are at least mostly in place. It's enough to see a clear way forward, and though businesses are going to have to stay on their toes for a while, it's enough to see that either success can come through or the whole thing is a disaster. With an improved likelihood of spending to follow—there's no sense in hoarding cash to survive a downturn that's less likely to happen than it was even a month ago—that should be a shot in the arm across the board.
Basically, with the broad strokes of the trade deal worked out, a lot of uncertainty in the field has been banished. That's why it's so critical to watch for optimism coming out in the earnings reports. If companies aren't feeling upbeat after this, the chances of them ever feeling upbeat again are shockingly slim. So watch for optimism in the earnings reports, or rather, watch more for a lack of optimism in the earnings reports, because that could be the biggest measure of a company's upcoming fortunes there is.