Any golfer will tell you one of the most common and costly mistakes in the game is not following through with your swing.
Any investor will tell you there's no surer sign of ambivalence than a big rally that gets no follow through. And that's exactly what Tobias Levkovich, the Chief U.S. Equity Strategist at Citigroup thinks will happen this earnings season. "People are getting excited about Q2 earnings being the next leg of the rally" he says. Instead of companies telling us everything will be fine, Levkovich says get ready to "hear those two awful words 'cautiously optimistic' a lot."
"I don't think companies are going to stick their necks out" he says, citing domestic uncertainty, slowing conditions in Europe, as well as tightening emerging economies too. "It's that lack of follow through that I think investors are going to be a bit disappointed with," he warns.
So what does the disappointment trade look like?
"You want to pick certain spots and hedge them" he says, -- such as being long energy but underweight in materials for cyclical exposure. Or long IT, short health care.
On the big picture, Levkovich says the anticipated ''2nd half rally" is more likely to be a September-October event rather than a robust six-month buying binge. Unlike some, who have ruled out a 2nd half earnings and/or economic rally all together, Levkovich says the absolute rate of growth isn't all that important to market performance. To make good money in the market, you don't necessarily have to make a call on the economy. Levkovich uses the Great Depression era of 1932 to 1939 as an example because "in that seven-year period there were five major trading rallies and the average gain was 93%."
As for right now, "we're not talking about a good economic environment... it's more about where you are on fundamentals relative to expectations," he says. In other words,what you and I might call "surprises."
Along those lines, Levkovich says his research on the spending plans of more than 700 non-financial U.S. companies suggests capital spending will be up by 17% this year - and that figure has actually risen from an 11% estimate just three months ago.
Even so, he says he's keeping a close eye on the budget negotiations in Washington as well as on the debt crisis contagion in Europe which is already spreading from Greece and Portugal to Italy and Spain. Levkovich would not discourage investors to book some profits before the great disappointment sets in.
What do you think? Are you expecting big things from 2nd quarter earnings season or are you hunkering down and bracing for disaster?
Let us know in the comments below, or for you Twitter types, @MattNesto is always open for business too.