Earnings Season: What to Watch
NEW YORK ( TheStreet) -- After a strong first quarter, the stock market, measured by the S&P 500 Index , got off to a weak start in the second quarter with a decline of -0.7% last week.
Investors focused on the Federal Reserve's lack of support for round three of quantitative easing in the minutes that were released from the March Fed meeting. As we noted a few weeks ago in our commentary, this is one of the 10 indicators we are watching that might foreshadow another spring slide in the stock market.
While macroeconomic data and events are likely to remain key drivers of the market this week, microeconomics will also garner investors' attention as companies begin to release their first-quarter earnings reports. While only a handful of S&P 500 companies report results this week, it is widely considered to be the start of earnings season with big, well-known companies like Alcoa(AA) and JPMorgan Chase (JPM) due to report first-quarter results.
Four times a year, investors focus on the most fundamental driver of investment performance: earnings. The close connection between earnings and stock market performance can be seen in the fact that the S&P 500 Index and earnings per share have both risen about 80% over the past three years. A slowdown in earnings growth may indicate the same for the stock market.
Stock market momentum has stalled over the past few weeks during the period known as the pre-announcement, or confession, season -- so called because business leaders often use this period to offer investors guidance on how the quarter's results are shaping up relative to expectations.
This season, of the companies that pre-announced first-quarter earnings guidance in recent weeks, the ratio of negative-to-positive news was 3.0, worse than the average ratio of 2.3 since 1995.
The first quarter earnings season runs about four to six weeks, starting around two weeks after the close of the quarter. During this earnings season, we are paying special attention to the breadth of earnings growth, earnings guidance on upcoming quarters, and profit margins.
Breadth of Earnings Growth
We believe first-quarter earnings are likely to post a mid-single-digit percentage gain from a year ago as earnings growth continues to decelerate. The fourth quarter of 2011 marked the first time earnings growth fell into the single digits since the recovery began in 2009. The slowing growth rate for S&P 500 company earnings reflects not only slower growth among individual companies, but also reflects the shrinking number of companies expected to post growth in earnings for the quarter with about 20% of companies expected to reveal declines.