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Sluggish Earnings Will Have Limited Impact on Stocks

NEW YORK ( TheStreet) -- Investors are currently dealing with a "tug of war" type battle in stock markets, balancing steady improvements in macro data with the possibility that the Federal Reserve will start removing stimulus.

Employment numbers for June were very strong, and data from April and May were revised higher, bringing the 12-month average in the non-farm payrolls to 182,000. The general consistency of these numbers has led to a more confident belief that the economy is ready to stand on its own two feet, and the S&P 500 is holding within striking distance of its all-time highs. But without added support from the Fed, the attention will have to turn back to fundamentals, and there is little on the horizon that looks capable of fueling another run higher in global stock markets.

As earnings season gets underway, it is clear that expectations are weak. Markets are looking for earnings growth in S&P 500 companies to come in under 1% for the second quarter.

On the revenue side, things aren't much better. Four years into the economic recovery, there is progress that has been made in earnings growth. But most of that progress was driven by cost cutting rather than elements such as increased sales and broader revenue growth.

At this stage, there is not much companies can do to remove costs from businesses, and the economy itself has not picked up enough to support strong improvements in the key areas of weakness. The result is we are caught in a low-earnings-growth environment, and the market's tepid expectations for second-quarter earnings are a reflection of this.

This is also an environment where operating margins have been a point of strength and a major source of support for corporate performances. This should continue during the second quarter, but don't expect this strength to be matched on the revenue side.

Most of the growth seen post-2009 came from the fact that companies were building off of a weakened base (created by the credit crisis a year earlier), and the outlook has since changed. The main question now is whether or not this scenario will be enough to propel investor optimism and generate another run higher in the benchmark indices.

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