With a lacklustre outlook for corporate earnings, investors can only hope it's another quarter of underpromise and overdeliver.
Alcoa Inc. will kick off another U.S. earnings season this week, planning to report results for the first three months of the year after markets close on Monday, followed by some major banks later in the week.
There are plenty of reasons for investors to be nervous. A weak U.S. jobs report last week contributed to a pullback in stocks, while other economic readings have been less than encouraging.
And the earnings outlook itself is bleak. Analysts currently expect S&P 500 earnings to increase by a mere 0.58 per cent from year-ago levels, which would be the lowest growth rate since the third quarter of 2009.
Expectations, however, are made to be beaten.
"I think investors have gotten pretty smart," about earnings season, and they know estimates are very conservative, said Christine Short, senior manager at S&P Capital IQ. When companies finish reporting for the first quarter, Ms. Short expects, earnings will likely have risen at a decent pace of about four to five per cent.
It's all part of the the tightly choreographed earnings season seen in recent quarters. Companies, mindful of giving investors even the slightest reason to be disappointed, issue downbeat guidance before quarter end. Analysts take the cue and reduce their estimates. Then, lo and behold, the companies issue better-than-expected numbers that exceed the consensus, leading happy investors to bid up the prices of their shares.
This year's first quarter is likely to follow the script.
"Because of [economic] uncertainty, companies have continually provided very negative guidance," said Ms. Short. "And then once they report, we say: 'Oh, they beat.'"
Ms. Short, who compiles Capital IQ's consensus earnings report, says a number of signs suggest profits might be better than expected.
Some companies that don't follow regular quarter-end accounting cycles have issued results already, and they've been pretty good. So far, of the 22 that have issued their numbers, 14 beat analysts' estimates, six missed and two matched, according to Capital IQ.
The list of early reporters includes a number of widely watched companies, such as herbicide and seed purveyor Monsanto Co. Its results handily beat consensus estimates, causing shares to rally after their release last week.
Although Alcoa leads the earnings calendar, a number of companies with more potential to move markets report later in the week.
Among them are U.S. banking behemoths JPMorgan Chase & Co. and Wells Fargo & Co. on Friday. Analysts estimate JPMorgan will report $1.38 (U.S.) a share, up from $1.31 a year ago and Wells will earn 88 cents, a nice rise from last year's 75 cents.
The Street isn't looking for anything flashy from Alcoa. The aluminum maker is expected to earn 10 cents a share, the same amount as a year ago.
Before last Friday's disappointing jobs numbers, U.S. stocks had been on a tear, rising nearly 10 per cent to new record closing highs for both the Dow Jones and the S&P.
The big question for investors is how much of the hope for higher profitability is already discounted in lofty share prices?
If stocks don't move much in response to the likely run of earnings beats, then investors will have something to worry about. Investors will be looking closely for any guidance on the rest of the year, and whether the slowdown suggested in last week's economic releases is making corporations nervous about future demand.
Analysts are projecting that earnings growth will pick up steam during the rest of 2013 and will rise 7 per cent over 2012 results. Those worried that stocks have become too pricey can take some solace from the forecast earnings gain. The forward price earnings multiple for the S&P, based on the year's expected profits, is only 14, so stocks are still reasonable value, although they're certainly not dirt cheap.