Could Earnings Season Kill the Rally?

04/09/2013 4:00 am EST

Focus: MARKETS

Jim Jubak

Founder and Editor, JubakPicks.com

Whether the market's uptrend continues should become clear as companies report first-quarter earnings, says MoneyShow's Jim Jubak, who explains what to watch.

For the week ahead, watch out for earnings season. It starts on April 8. This is earnings season for the first quarter of the fiscal year, and it starts, as usual, with Alcoa (AA).

The issue here really is, as you may have noticed: starting in early February, the market has been getting more and more nervous. Not nervous enough to send it down, but nervous enough to stop it from going higher at the pace that it had been moving.

The real worry is how much economic growth is there out there, in the US particularly and in the world in general, to keep this rally going on? Earnings season, I think, is going to be critical for that, both in terms of looking back at the quarter that we have just finished, but also really looking ahead for the rest of 2013.

The worry is that corporate earnings in the United States are not going to grow as much as expected; that we are going to see a slowdown. That we haven’t yet felt the effects of the tax increase at the end of the year—the increase in the Social Security withholding tax—and we haven’t felt the effects of the sequester of federal spending. Those things are going to have an impact on the economy, as the fear goes, and that is going to slow earnings growth.

Companies have really not seen any of this, and never said any of it, and it is probably because it is too early. The first indication that there might be a problem came from Delta (DAL) on April 2, when the company said "Hey, you know, we’re not seeing as much government travel—which is often booked at the last minute—and that is going to have an impact on our revenues." It is the first time anybody has explicitly said there is an effect to those government-spending cuts.

As we are looking at the quarter, you have to justify stocks at this price. You have to meet expectations for growth—you have to keep a fairly healthy growth rate in the US economy, and the worry is that we are not going to get that.

Alcoa is not going to make much difference, because that is basically a read on the whole economy, but as we roll into things like McDonald’s (MCD), as we roll into general consumer stocks in the United States as the earnings season goes by, then we will have a better read on what growth is going to look like, and especially on what companies are expecting for the second and third quarter of 2013. That is really critical to keep this rally going.

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