The Dow: Can Earnings Rescue Stocks?

The macro backdrop for stocks is dour, and the indices reflected that today, with the Dow Jones Industrial Average (INDEX: ^DJI  ) and the S&P 500 (INDEX: ^GSPC  ) losing 0.2% and 0.3%, respectively. Positive surprises from some of the bellwether stocks reporting in this first week of earnings could reverse that sentiment; unfortunately, that looks like wishful thinking. More on that a bit later.

But what's this poisonous macro backdrop I'm referring to? First China, then the world: After the World Bank lowered its 2012 growth forecast for China to 7.7% from its May estimate of 8.2%, it's the turn of the International Monetary Fund to bring in its forecast for global growth this year to 3.3%. If this materializes, that would be the slowest rate since 2009, which suffered the impact of the global economy's collision with the Lehman iceberg. Worse still, the fund sees an "alarming risk" of an adverse scenario, with 1-in-6 odds of sub-2% growth. On a global level, that level of growth is probably equivalent to a recession.

So why do I think we're unlikely to see a lot of positive earnings surprises? Allow me to pass the microphone to Morgan Stanley's strategists, who wrote in a recent note:

"Roughly, 50% of the companies [in the S&P 500] are expected to experience year-on-year contraction in net margins during the quarter, including heavyweights like Chevron (NYSE: CVX  ) , Microsoft (Nasdaq: MSFT  ) and Google (Nasdaq: GOOG  ) . While revenue growth expectations have largely held up, earnings estimates for the quarter have seen sharp downward revisions in the last two months hurt by the highest ratio of negative-to-positive guidance any time in this cycle."

In that environment, investors need to monitor their allocation to equities closely or focus on picking stocks that have a secular headwind behind them. One example of the latter: The Only Stock You Need to Profit From the NEW Technology Revolution. Click here to find out which company is in this fortunate position.

Alex Dumortier, CFA, has no positions in the stocks mentioned above; you can follow him on Twitter, @longrunreturns. The Motley Fool owns shares of Google and Microsoft. Motley Fool newsletter services recommend Chevron and Google. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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