Critical Earnings Season Begins Tomorrow

Wyatt Investment Research

Alcoa (AA) reports fourth-quarter earnings tomorrow, unofficially kicking off what is shaping up to be a pivotal earnings season.

With the fiscal cliff averted but another debt ceiling looming at the end of February, financial markets are seemingly at a historical crossroads.

When Wall Street opened its doors this morning, the S&P 500 was at its highest level in five years after last week’s 4.6% post-fiscal cliff surge. By many accounts, this market is overbought, and has nowhere to go but down.

However, January and February have been boom months for stocks the last two years. With no more fiscal cliff to hold them back, why should this year be any different?

There are several reasons.

For one, any boost stemming from Congress’ last-minute (literally) deal to avoid the fiscal cliff is probably already baked into the equation after last week’s huge move. Also, because Congress left many stones unturned in its bare-bones compromise – a new debt ceiling set to expire at the end of February, deferred spending cuts scheduled to go into effect in early March, etc. – Wall Street’s collective sigh of relief last week likely pushed stocks too high.

Between the joy of avoiding the fiscal cliff and the angst that accompanies any debt ceiling deadline (see July 2011), investors are faced with an almost unprecedented set of circumstances. Who knows which way the market winds will blow over the next couple months?

With so much uncertainty, the upcoming earnings results should have a major bearing on where stocks go next. Let’s hope they’re better than last season’s disappointing round of earnings.

Fewer companies beat revenue estimates in the third quarter than at any time since the recession. As a result, stocks spiraled downward for a month, with the S&P 500 shedding more than 100 points from October 17 to November 15.

Election and fiscal cliff uncertainty contributed to the pullback. While the new set of question marks may seem trivial by comparison, they will begin to seep into investors’ collective psyche if Congress stays true to form and waits until the absolute last minute again to avoid a debt default.

A stronger round of earnings could do a lot to offset that uncertainty. Without overstating things too much, tomorrow’s Alcoa report could tell us a lot about what we should expect in the coming weeks.



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