Wake-Up Call for U.S. Stocks

As earnings season got started this week with Alcoa surprising to the upside I wanted to give readers a view of what to look forward too and I'm not quite sure that Alcoa will be the norm.  Here is how the typical earnings game is played.  


First companies know that if they miss expectations their stock is going to get crushed.  So what has become the norm is that some companies are pre-announcing bad news.  Yes their stock price may go down but they don't feel near the pain if that surprise to the downside is on earnings day.  Then what can happen is when the actual earnings day arrives a company announces better numbers than the pre-announced results but worst than their original estimate and the stock can head higher.


How long can the US productivity train keep earnings heading higher?  This productivity theme been a focal point of numerous points here at DWCM over the past 6 months not only because it affects the labor markets but also the impact it has on a company's bottom line.


Analysts have been lowering earnings projections steadily over the course of the quarter.  Earnings are typically but not always the driver behind stock price appreciation.  So when earnings growth dries up so too may the run in stock prices.  With demand sluggish at best companies will only be able to ride managing earnings through tightening expenses for only a little bit longer. 


From the WSJ

• "The 'easy gains' of the last few months may very well be behind us," says Jason Trennert, chief investment strategist at Strategas Research Partners LLC, a brokerage and research firm. "We'd play more cautiously as the market works through this period of slowing momentum" for share prices.
• Analysts have been lowering expectations for both first-quarter and full-year earnings. They now expect earnings to show average growth of 0.95% over a year earlier in the first quarter.
• That would be the lowest rate of year-to-year growth since the end of the financial crisis, and down from expectations of 4.5% in early January, according to S&P Capital IQ. As recently as late September, analysts were looking for 10% growth.
• Corporations have already fired workers and sliced expenses to keep profit margins high. But, with the global economy still sluggish, revenue gains will be hard to come by.
• But history shows that all may not be bleak. Stocks have at times managed gains even with earnings estimates falling. Earnings estimates were also on the decline in the second quarter of 2009. But the S&P 500 advanced 16% that quarter, as a three-year-old bull market got under way following the stock plunge during the financial crisis.

• Some bulls argue that even a weak first quarter won't be enough to stop the market rise, if investors regard a slowdown in profits as a healthy breather. They argue that stocks as a whole are still relatively cheap. Even after the first quarter's gains, the S&P 500 is trading at 13 times forward earnings estimates, below the long-term average of about 16 times.
• "Hiring means productivity could come down in the short term, but in the long run it helps demand," says Christian Thwaites, president and chief executive of Montpelier, Vt.-based Sentinel Investments, which manages about $30 billion.
• "Subpar economic growth in the U.S., a recession in Europe, and growth of, let's say, 7.5% in China don't seem to be all that consistent with" robust earnings growth, Mr. Trennert told clients Friday.