Tags: McCaughan | Q3 | earnings | bottom

Jim McCaughan: Earnings at Their Worst Now, Many Due for Gains

Wednesday, 24 Oct 2012 08:35 AM

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Third-quarter earnings are disappointing investors today, but they might be bottoming out for some time to come, meaning now is a great time to buy, said Jim McCaughan, CEO of Principal Global Investors.

Tech companies, small-cap companies and others will represent attractive buying opportunities once today’s pullback runs its course.

“It is tough out there. The third quarter will most likely turn out to be the weakest quarter either side, it’s the weakest in about a year-and-a-half and most likely turns out to be the weakest quarter of the next three or four as well,” McCaughan tells Fox Business News.

Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown

While companies have been cutting outlooks and their quarterly earnings have missed expectations, parts of the economy that have weighed on recovery are showing signs of improvement.

“The housing market looking a bit better in parts of the country and some innovation is going on — I have been quoted saying the iPhone 5 is probably a bigger stimulus to the economy than QE3,” McCaughan said, referring to the Federal Reserve’s third round of quantitative easing taking place right now, under which the Fed will buy $40 billion in mortgage-backed securities a month from banks to spur recovery by pumping liquidity into the financial system.

The U.S. labor market is improving as well, which will boost quarterly earnings down the road in both big and smaller companies.

“I would think that you should be looking at small caps, which will continue to do quite well with the U.S. economy,” he noted, adding technology could improve as well.

Meanwhile, companies might be cutting earnings forecasts to paint a bleak picture down the road, but will shine later when they report things really aren’t that bad.

“I would say that the likelihood here is companies are really massaging expectations down and will probably do all right going forward,” McCaughan said.

The Dow Jones Industrial Average tumbled 240 points Tuesday to a seven-week low, as big names like DuPont and 3M missed Wall Street earnings estimates.

Global uncertainty is affecting U.S. companies on top of a sluggish economy at home.

“Our trading partners have bigger economic issues than even we have, and that’s why we saw September drop off significantly for companies,” said Tim Ghriskey, chief investment officer at Solaris Asset Management, according to CNNMoney.

“There’s continuing uncertainty about the economic health of Europe and China,” he added.

Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown

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