Earnings Season Starts This Week

With nothing much on the economic calendar this week, the market’s attention will likely shift to the fourth quarter earnings season which gets under way with Alcoa’s (AA - Analyst Report) report after the close on Tuesday. The reporting season gets into high gear next week as the big banks report results, but a number of major companies, including Wells Fargo (WFC - Analyst Report) and Monsanto (MON - Analyst Report), will come out with fourth quarter results this week.

All indicators are pointing towards another underwhelming earnings season, not much different from what we saw in the third-quarter reporting cycle. But while expectations for fourth quarter earnings have been steadily coming down in recent weeks, investors appear unwilling to bring down estimates for 2013 as they hold on to hopes of a ramp in corporate profitability in the coming quarters. Guidance from management teams on earnings calls is always very important, but it is particularly important this reporting season given the lofty-looking earnings expectations for 2013.

Total earnings in the fourth quarter are expected to be up +0.4% from the same period last year. This is a sharp drop from the +7% earnings growth rate that consensus expected just three months ago.

Overall, ten of the 16 Zacks sectors will have negative earnings growth, with even the Tech sector experiencing earnings decline of -3.5% (Tech sector earnings were barely in the positive column in the preceding quarter). The Construction sector has the best earnings growth profile off all sectors, a function of the positive momentum in the housing sector. Total earnings in the Construction sector are expected to up +33.3% in the fourth quarter. The only other sector with double-digit earnings growth this quarter is Business Services.

The key question at this stage is whether the stock market momentum can be sustained in the face of negative momentum on the estimate revisions front. The bulls point towards the attractiveness of equities relative to other asset classes and pin their hopes on an expanding market multiple and declining risk premiums. Maybe the bulls have a point, but it will still pay to stay focused on the evolving earnings picture in the coming days.