US Earnings Season Almost Over - Now We Wait

First-quarter earnings season is just about over. Next week, we will get numbers from more retailers, including Target (TGT) and Lowe’s (LOW), as well as tech giant Hewlett-Packard (HPQ). After those reports, there will not be a great deal of earnings news until after Independence Day.

This seasonal void will cause the number of earnings estimate revisions to drop, removing a catalyst for the markets. As I said in the latest Zacks Elite video, there have been approximately 15,000 revisions made during the past 4 weeks. That total will likely be cut in half. Furthermore, as the number of estimate revisions fall, the proportion of negative to positive revisions will increase.

In the absence of earnings data, what is there to move the markets? General Motors (GM) is facing a looming deadline and bankruptcy looks likely. I’m not so concerned about whether the company will file or not as I am about the prospects of the process getting messy. A disruption to the automotive sector could send a big ripple across the entire economy.

Best case scenario? A deal with bondholders is reached quickly and GM gets restructured. Even this best case scenario isn’t positive, since it will essentially wipe out the value of GM shares and cause thousands to lose their jobs. (Note to self, bring the Saturn to the dealership before it’s shut down.)

The stress tests proved that mega banks are too big to fail. Still, share dilution should drive down prices. Plus, there are reports this morning that the government is meddling with Bank of America’s (BAC) management. Not to mention the fact that foreclosures and credit card defaults are rising, and will continue to rise throughout the remainder of the year.

The only positive is that the pace of economic deterioration is slowing. Though this is an improvement, it is important to realize that the economy is still contracting. Furthermore, I don’t expect the eventual economic rebound to feel like a recovery. In other words, the numbers may show growth, but many Americans will still face job cuts and depressed wages.

I’ve said before that I expect the markets to pull back. I think that decline is starting. How bad will it be? A correction of 10% or worse would not surprise me. That’s the bad news.

The good news is that, barring unexpected events, I think the March lows will hold. More importantly, I think a pullback will provide a buying opportunity.

Many of the stocks that led the recent rally were from risky sectors. A correction would cause an inevitable shake up and hopefully get traders focused on those industries likely to show true growth later this year and next.

We’re not out of the woods, but the forest does seem to be getting less dense.

Portfolio Updates

We sold American Italian Pasta (AIPC) from both the Focus List and the Timely Buys List. Though the company topped fiscal second-quarter earnings expectations, revenues were below the consensus estimate. As a result, the stock plunged.

Notably, the 2 analysts following the stock are very mixed on its outlook, with one raising full-year earnings estimates and the other cutting full-year estimates. The disagreement reinforces our decision to have sold the stock.

No additions were made this week.

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