Earnings reporting season kicked off this week and will run for several weeks. Earnings increases are expected to be rather tame this time, on the order of just 2.4%. I think the rise in corporate growth peaked last year, after several years of cost-cutting and a slowly recovering economy.
Of course, in the long term, increases in earnings are what push stock prices higher. That’s why stocks over a very long period of time outperform most other investments.
But, over the short run, stock prices can be pushed one way or the other by other factors, such as changes in interest rates and uncertainty in the economy. So it is that over this earnings season, stock prices as a whole will be more influenced by the debt ceiling debate than by corporate profits.
Not only does the debt ceiling debate create economic uncertainty but the Democrats are on record as saying they want more tax increases in any sort of package. How successful they are in that, and what shape those tax increases take will influence optimism in the stock market. And make no mistake, the market is emotional in the short run, and can be bid up or brought down by the level of investor optimism.
This year, I recommend considering putting more money into overseas markets, especially emerging markets where growth is higher, banks are more stable and prices are not any higher than in the U.S.