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A nuclear plant is leaking plutonium on the devastated coast of Japan. There's a shooting war involving U.S. planes in Libya, where 2% of global oil output has been shut off until further notice. Gasoline is pushing $4 a gallon as Arab revolutions haunt the obsolete, soft and clearly rattled Saudi monarchy.
And the market couldn't care less. It's doing a rain dance ahead of the quarterly downpour of pennies per share, fully expecting the richest bounty since the summer of 2007.
Companies included in the Standard & Poor's 500 Index ($INX) are expected to earn a bit more than $22 a share on an operating basis, up 14% on a year ago.
The gravy is looking very lumpy, however, with the energy sector expected to extract nearly half of the S&P's entire earnings haul. In contrast, the consumer discretionary group will be lucky to bag the expected 5% annual gain, while telecoms and utilities may post slight drops.
Earnings seasons have been good to shareholders for the last two years. Over that span, the months associated with the crush of corporate results -- January, April, July and October -- have seen the S&P 500 rise an average of 3.2%, or more than 50% faster than it did the rest of the time.
The 9.4% jump in April 2009 certainly helped, as did the 7.4% spurt three months later. But stocks also rallied 6.9% last July and 3.7% in October.
Princes and paupers
There's a trend afoot that seems a better bet than hopes that profits will beat not just analysts' forecasts, but shareholders' possibly loftier expectations. Like the U.S. economy and the world, this market is in the process of dividing into the haves and the have-not-quite-enoughs.
In addition to commodity suppliers, the richer group includes emerging-market exporters and other suppliers to corporations, the larger the better. That's where the growth and the money reside.
According to Bloomberg News, companies sitting on $940 billion in cash are planning to boost investment in plants and equipment by a record 22% this year. With S&P 500 sales expected to grow 14%, such spending is likely to earn better returns than cash, which could have trouble earning anything at all.
In contrast, companies catering to U.S. consumers are stuck with much more cautious and budget-minded customers. And it's not all about the $4 gas.
For example, personal income last month rose 0.3% in nominal terms, but actually slipped 0.1% after taxes and inflation took their toll. Personal spending, up 0.7% nominally, was just 0.3% higher factoring out inflation.
Looking at statistics from several prior months, John Mauldin of Millennium Wave Investments makes a convincing case that the consumer is getting squeezed as incomes fail to keep up with prices.
This is the Achilles' heel of the market, and it's reflected in the way investors have responded to recent cautious commentary from several key consumer companies.
Best Buy (BBY, news) on March 23 beat the consensus earnings estimate, but still posted an earnings drop on weaker sales. Domestic same-store sales were down a heftier-than-expected 5.5% -- and while some of that could be laid to last year's strong PC sales, the fact is that consumers are not buying expensive new TVs the way they used to.
And by the time executives on the conference call warned us not to expect any uptick in demand until the second half of the year, what had been a 5% pre-market gain turned into a 5% setback for the shares.
The next day, Darden Restaurants (DRI, news), the owner of Red Lobster and Olive Garden eateries, also topped estimates and even nudged its annual guidance above forecasts. But the stock tanked 5% after the CEO said on the conference call that "the environment, while improving, remains more fragile than normal, and it's very much driven by promotional effectiveness."
Marriott International (MAR, news) had the temerity to trim its revenue forecast on March 28, saying that while overseas growth is humming along at 11%, North American rooms are ringing up a gain of 5% to 6%, not the previously forecast 6% to 8%. Marriott is running into resistance against its increased East Coast rates.
The stock slid 6% and took the entire hotel sector downward.
There were no such reservations for Accenture (ACN, news) after the management consulting and technology services giant said on March 25 that annual sales could exceed current estimates by up to 17%. Second-quarter earnings jumped 26%, and the CEO and CFO used the word "strong" 17 times in the space of a few minutes on the conference call, along with "outstanding," "exceptional" and "momentum."
Oracle (ORCL, news), whose customers are similarly flush and uninhibited by a 10% increase in gasoline prices, said pretty much the same thing later in the day.
Where to invest -- and not to invest
How the market deals with this divide should be one of April's most telling story lines. I would bet on the stocks of companies posting strong sales gains and good recent price momentum, especially those that don't have to sweat a failure of nerve by American consumers.
That would include Apple (AAPL, news), which does not compete on price. The company is growing revenue by 70%, and the stock is up 8% so far this year. Heavy equipment maker Caterpillar (CAT, news) is posting sales growth of 62%, and its shares are up 19% in 2011. Foreign sales account for two-thirds of the company's revenue.
Chip equipment manufacturer Applied Materials (AMAT, news)is seeing revenue growth of 45% and a gain in its stock price of 12% this year. North America accounts for just 23% of sales.
Who's vulnerable? Urban Outfitters (URBN, news), Nike (NKE, news), Carnival (CCL, news) and Starwood Hotels & Resorts Worldwide (HOT, news) are all among the 20 worst-performing S&P 500 stocks over the last month, and all are down significantly year-to-date.
This article was reported by Igor Greenwald for MoneyShow.com.
