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Caterpillar vs. A Fearless Market


It wasn't that long ago that a pessimistic forecast from a single blue chip industrial company could tank the entire market forecast. Not only have stocks stood strong in the face of a warning from the world's largest heavy equipment maker Caterpillar (CAT), they've also gotten over the cautions of the top delivery company FedEx (FDX), and shaken off the uninspiring outlook from the biggest chipmaker on earth Intel (INTC). And that's just in the last month!

Amazingly, despite this steady drip of negativity, where according to FactSet data 80% of third quarter earnings pre-announcements have been negative, the S&P 500 has continued to chug along. Not only have we extended a bull market that began in 2009, but we've also touched a 57-month high and en route to the fourth consecutive month of gains.

It's enough to make one wonder, can anything knock this market down?

"I'm not sure where the tipping point will be, but I think it may be if we get an earnings miss in some of these so-called safety stocks," says Charlie Smith, chief investment officer at Fort Pitt Capital in the attached video, citing names like Procter & Gamble (PG) or Colgate (CL) as the kind of "safety stocks" that the market would not expect to get bad news from.

"The potential for broad based earnings weakness is there, it's just that people haven't woken up to the idea that it may happen in some of the safety stocks as well," he says, explaining that this "potential weakness" would indeed be a negative and market moving surprise.

As for names like FedEx or Caterpillar, Smith says the muted reaction in the stock "indicates that it was pretty well anticipated," as does the fact that CAT shares had already shed 25% before management actually dropped the bomb.

With Alcoa (AA) set to report earnings on October 9th, the degree to which disappointment has been priced into the market will be made clear, though many investors, including Smith, are confident that consensus estimates will be sufficiently lowered by then to allow most companies to post better than expected results.

"The expectations bar has already been lowered, so I think the earnings bar will be lowered enough so that we don't see a cataclysmic decline (of 6-10%)," Smith says.

In the meantime, he is urging clients to look at cyclicals that are 25% off and offer yields of 2 to 3% .