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Earnings season preview: can record high stocks withstand plunging expectations?


For something that happens with such regularity and is so important, it’s surprising that earnings season can still sneak up on us. And yet, with Alcoa (AA) reporting this afternoon and JPMorgan (JPM), Wells Fargo (WFC), Bank of America (BAC) and more set to deliver results next week, fourth quarter earnings season is about to launch, with its own unique set of trends and peculiarities.

“The earnings growth rate we’re now expecting (for the S&P 500) is 6.3% for the 4th quarter,” says John Butters, senior earnings analyst at FactSet in the attached video.  “That’s down (about one-third) from 9.6% at the start of the quarter.”

An expected capitulation of this magnitude is nothing new, and Butters says the slumping growth outlook was lead lower by cuts in commodity-related estimates, particularly in the energy and materials sectors. But he says the bar lowering, so to speak, was also impacted by an unprecedented stream of negativity and uncertainty early in the quarter, when the country was frozen by the threatened - then actual - government shutdown for most of October.

“We did see another uptick in negative guidance up to a record 94 companies,” Butters says, adding that a comparably small amount of positive guidance also stood out last quarter with just 13 companies having the nerve to say something good.

For those top-line proponents who are looking to the 4th quarter to deliver the revenue growth they’ve waited so long for, Butters says this is not likely to be your quarter. That’s because sales are pegged to grow a paltry 0.3% from where they were a year ago.

Of course all of this pre-report positioning and revising, whether you call it cautious, pessimistic or pragmatic, comes at a time when the stock market has been on a hot streak and set 50 record-high closes in the past year 

“It’s one of those dichotomies that’s really hard to explain but it is a trend we’ve seen in the last four quarters, and in 13 of last 20 quarters, where although the numbers have gone down during the course of the quarter, the market goes up,” Butters says.

Whether that diverging trend of rising stocks and falling estimates can continue remains to be seen, but at the very least bodes watching.

Disclaimer: Merrill Lynch is not responsible for the editorial content of this program.

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