The Day Ahead: Don't Fear the Unknown

What? You thought this was to be another quantitative-easing rundown gleaned from combing four years of Helicopter Ben comments and random YouTube videos? Nah -- been there, done that (for most of August). At least for today, I want to expand upon a couple hints I dropped Monday regarding third-quarter earnings season. Sure, everywhere you turn there is talk of QE-associated tail risks, mouth risks, hoof risks and the like. But a very empty bucket is out in the open labeled "Corporate Fundamentals Now." There is this earnings recession that I have outlined recently, and the concept of leaky profit margins, but I want to tie it all together in order to maximize your preparedness.

The reality, as I see it, is that the market is headed for a series of judgment days during which investors -- both of the deep-pocketed variety and the retail Johnny-come-latelies -- will have to make a choice. They'll all have to decide whether significantly accommodative global monetary policy, plus China infrastructure spending, are valid enough arguments to further expand price-to-earnings multiples on decelerating earnings growth and fiscal-cliff threats (though, hello, there is no real demand in China to be quantified just yet). Then, investors will have to square their decisions with sell-side estimate modeling for a revival in profit growth by the fourth quarter -- the underpinning of fresh upward adjustments to strategists' year-end S&P 500 value targets.

On the eve of Texas Instruments' ( TXN) mid-quarter update, and a W.W. Grainger's ( GWW) preview later in the week, a battle must be brought to our attention -- the optimistic, for W.W. Grainger, vs. Texas Instruments, with sentiment that's probably-not-sufficiently-realistic. The problem is that optimism on W.W. Grainger could really provide a shock to the bulls should the company in fact warn. It could cause them to question that "all is fine and dandy" management approach, employed by others in Corporate America back in the second quarter.

On the other hand, if a Texas Instruments sounds incrementally more cautious on top of already tepid comments and guidance, that will obviously be no good, and it could trigger the bears to become more bearish and suck in some new members. In the end, we would have two additional early-inning third-quarter warnings -- ones that are congruent with what FedEx ( FDX) and Intel ( INTC) shared -- just as we move beyond easing monetary-policy events.

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