What Will the Earnings Reports Tell Us?

01/07/2014 10:00 am EST

Focus: MARKETS

Jim Jubak

Founder and Editor, JubakPicks.com

When the fourth quarter earnings reports roll out this week, will the promise of US economic growth be fulfilled? MoneyShow's Jim Jubak, also of Jubak's Picks, ponders this, and offers some places where he thinks we'll feel it the most.

Fourth quarter earnings reports start this week, and the market will be looking to see if recent data showing the US economy gaining in strength, is reflected in better than expected corporate earnings.

The US economy ended last week on a roll, with the manufacturing sector growing at its second best pace (since April 2011) in December, and housing prices climbing by the most in seven years. This week will include the release of jobs numbers for December on Friday, January 10. The consensus, among economists surveyed by Briefing.com, calls for the economy to have added 197,000 jobs in the month. That would be a slight dip from the 203,000 added in November, but wouldn't be enough to negate growing confidence in US economic growth. (Especially since jobs numbers that cover the holiday period are subject to big and potentially misleading seasonal adjustments that attempt to account for holiday hiring.)

But, with US stock indexes trading near historical highs, traders and investors will be looking to see if the promise of that stronger growth has started to translate into better than expected corporate earnings—or at least the promise of better than expected earnings in company guidance for the first quarter of 2014.

Alcoa (AA) kicks off the earnings season when the company reports on Thursday, January 9, after the close. Analysts aren't expecting a huge gain in earnings for the quarter: forecasts call for 5.2% earnings growth in the period, according to Bloomberg. Factset calculates a slightly higher number, with projected 6.3% earnings growth for the quarter. Analyst earnings projections typically come down as the quarter progresses, and the fourth quarter is no exception: Back on September 30, analysts were looking for 9.6% earnings growth for the fourth quarter, according to Factset. The only sector to show improved estimates has been the Telecom Services sector, which went from 14.2% growth to 14.3%. The biggest drop has been in the Energy Sector, where analysts have gone from a projected drop of 0.9% in earnings, to a fall of 7.8%.

The most likely source of fuel for a continuation of this rally will come from guidance, in my opinion. So far, 107 of the 500 companies in the S&P index (SPX) have issued guidance for the fourth quarter and the trend is very negative, with 94 issuing negative guidance and only 13 issuing positive guidance. That's 88% negative, well above the five-year average of 64%.

Which, of course, sets the table for a potentially big turn in guidance. It wouldn't take very many companies saying they see the first quarter as better than expected, to top the negative trend on fourth quarter guidance. And that trend would give investors and traders something to hang their hopes on for continuation of the move upward in US stocks.

Full disclosure: I don't own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did not own shares of any company mentioned in this post as of the end of December. For a full list of the stocks in the fund as of the end of June see the fund's portfolio here.

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