The following is an excerpt from STEVEN M. SEARS | October 6, 2012 | Barrons.com |
October is a dangerous month to buy stocks, Mark Twain once noted, and so are all the rest. And as we head into third-quarter earnings season—and the 25th anniversary of the 1987 stock-market crash—it’s worth examining where the specific risks — and opportunities — lie right now.
Yes, the Standard & Poor’s 500 Index is up 16.2% this year, but other metrics, including revenue growth and return on equity, aren’t so great. In the second quarter, S&P 500 index sales grew 3%, the lowest rate since 2009, while the return on equity was 16.5%, down slightly from the first quarter. Watch profit margins; if they fall, stocks could follow.
Optimists will note Friday’s better-than-expected employment report and that the September Manufacturing ISM Report on Business was 51.5%, suggesting economic growth for the first time in three months. Pessimists will note that second-quarter gross domestic product was revised to 1.3% from 1.7%, and quote the prediction of Olivier Blanchard, the International Monetary Fund’s chief economist, that the world economy won’t recover until 2018.
All this imbues third-quarter earnings season with more significance than generally understood. Morose earnings reports, and pre-announcements, could influence election results.
The first results arrive Oct. 9 with Alcoa (AA). Pay attention to investor reaction for insights into how similar results might be greeted.
Many investors are already jaundiced since Caterpillar (CAT) and FedEx (FDX) warned in September about slow global economic growth in the next few years. Hewlett-Packard’s (HPQ) midweek drubbing, after management revealed that 2013 revenue would fall in every business except software and that operating margin would decline, was a violent hint of the future.
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