Back To Reality – Earnings Season Kicks Off

Writing in today’s Wall Street Journal E.S. Browning said (subscription required):

Whether, and how, the [forthcoming 1st quarter] profit news surprises investors is likely to be the main determinant of the market’s direction in the next few weeks.

Finally we can get beyond all the obsessing about the Fed and the Jobs Report and get on to something that really matters: earnings kick off tomorrow when Alcoa reports after the close!!!!

And what is abundantly clear is that things have the potential to get dicey.  Analysts have reduced their estimates for S&P 500 1st quarter earnings growth from 8.7% at the start of the year all the way down to 3.3% currently – it was 3.8% a week ago:

‘The numbers are slipping away more quickly than one would expect,’ said Albert Edwards, global investment strategist for Dresdner Kleinwort Securities in London.  ‘The market really hasn’t taken the risk into account’.

This would break a long streak of double digits earning growth for the S&P.  According to Tim Hayes, chief investment strategist at Ned Davis Research, that is inauspicious because periods in which earnings growth slows tend to be challenging for stocks (“A Caution Signal on Profits.  A Red Light for Stocks?”, Paul Lim, NY Times, Sunday April 8, 2007). 

The 1st quarter of 2006 was an excellent one for earnings.  The S&P 500 as a whole was up 16% from the year earlier period and energy stocks 36% (“Less Gain, More Pain” (subscription required), Jacqueline Doherty, Barron’s, Saturday March 31, 2007).  There are some real tough compares here.  And the housing bubble and all the fall out from it weren’t even on the radar back then.  Elevated put prices (subscription required) reflect the view of sophisticated investors of the potential for a market correction in the next three months.