A number of US blue chip companies reported disappointing Q4 earnings results.
It's less realistic today to expect single stocks to represent entire business segments.
Q4 2010 earnings are not being compared to overly depressed levels, making the dramatic overall gains we've seen in the past four quarters harder to come by.
Just because Q4 earnings may be more subdued doesn't mean US economic growth is faltering or stocks won't do well—investors will simply have to be more selective.
A bout of blues hit stocks early Tuesday—a number of US blue chip companies reported disappointing Q4 earnings results, initially weighing down markets, which ended the day mostly flat.
"Blue chips" are single companies often regarded as bellwethers of their industries. The idea was first introduced in the early 1920s—and its use today is more of a holdover from tradition than a truly practical application. The modern stock market is increasingly bigger, more diverse, and more global—thus it's less realistic to expect single stocks to represent entire business segments.
We're still early in the earnings season, with 127 S&P 500 companies expected to report this week. It's important to recognize Q4 2010 earnings are not being compared to overly depressed levels, unlike in previous quarters. This makes the dramatic gains we've seen across the board in the past four quarters much harder to come by—and realistic expectations should be tempered to match.
Additionally, analysts' expectations can quite often lag reality. For example, analyst expectations can be too dour coming off a period of depressed earnings—as they were for much of 2010. And the reverse! A series of stellar quarters can pump up expectations just in time for firms to decelerate into more normal growth rates—so it's key for investors to discern between truly poor earnings results and subjectively disappointing results.
Also, just because Q4 earnings overall may be more subdued versus prior earnings seasons or a few companies fail to meet expectations doesn't mean US economic growth is faltering or stocks won't do well. Investors will likely just have to be more selective than in recent years—without the benefit of the bounce off the bottom boosting almost all stock categories. Companies will likely not continue to post rising earnings in every sector, but instead, it's likely some companies in some industries will outperform—still giving investors opportunities to add value to portfolios.
Weaker-than-expected earnings from a few blue chips or other companies this quarter following a strong streak of continually rising overall profits shouldn't surprise—nor necessarily disappoint. They certainly do not automatically signal worse times ahead for stocks or the economy. Bull markets and business cycles don't proceed in an orderly, smooth fashion. Irregularity should be expected.