"Cliff' concerns give way to earnings focus

NEW YORK Fri Jan 4, 2013 6:40pm EST

A trader looks at computer monitors while working on the floor of the New York Stock Exchange November 5, 2012. REUTERS/Chip East

A trader looks at computer monitors while working on the floor of the New York Stock Exchange November 5, 2012.

Credit: Reuters/Chip East

NEW YORK (Reuters) - Investors' "fiscal cliff" worries are likely to give way to more fundamental concerns, like earnings, as fourth-quarter reports get under way next week.

Financial results, which begin after the market closes on Tuesday with aluminum company Alcoa (AA.N), are expected to be only slightly better than the third-quarter's lackluster results. As a warning sign, analyst current estimates are down sharply from what they were in October.

That could set stocks up for more volatility following a week of sharp gains that put the Standard & Poor's 500 index .SPX on Friday at the highest close since December 31, 2007. The index also registered its biggest weekly percentage gain in more than a year.

Based on a Reuters analysis, Europe ranks among the chief concerns cited by companies that warned on fourth-quarter results. Uncertainty about the region and its weak economic outlook were cited by more than half of the 25 largest S&P 500 companies that issued warnings.

In the most recent earnings conference calls, macroeconomic worries were cited by 10 companies while the U.S. "fiscal cliff" was cited by at least nine as reasons for their earnings warnings.

"The number of things that could go wrong isn't so high, but the magnitude of how wrong they could go is what's worrisome," said Kurt Winters, senior portfolio manager for Whitebox Mutual Funds in Minneapolis.

Negative-to-positive guidance by S&P 500 companies for the fourth quarter was 3.6 to 1, the second worst since the third quarter of 2001, according to Thomson Reuters data.

U.S. lawmakers narrowly averted the "fiscal cliff" by coming to a last-minute agreement on a bill to avoid steep tax hikes this weeks -- driving the rally in stocks -- but the battle over further spending cuts is expected to resume in two months.

Investors also have seen a revival of worries about Europe's sovereign debt problems, with Moody's in November downgrading France's credit rating and debt crises looming for Spain and other countries.

"You have a recession in Europe as a base case. Europe is still the biggest trading partner with a lot of U.S. companies, and it's still a big chunk of global capital spending," said Adam Parker, chief U.S. equity strategist at Morgan Stanley in New York.

Among companies citing worries about Europe was eBay (EBAY.O), whose chief financial officer, Bob Swan, spoke of "macro pressures from Europe" in the company's October earnings conference call.

REVENUE WORRIES

One of the biggest worries voiced about earnings has been whether companies will be able to continue to boost profit growth despite relatively weak revenue growth.

S&P 500 revenue fell 0.8 percent in the third quarter for the first decline since the third quarter of 2009, Thomson Reuters data showed. Earnings growth for the quarter was a paltry 0.1 percent after briefly dipping into negative territory.

On top of that, just 40 percent of S&P 500 companies beat revenue expectations in the third quarter, while 64.2 percent beat earnings estimates, the Thomson Reuters data showed.

For the fourth quarter, estimates are slightly better but are well off estimates for the quarter from just a few months earlier. S&P 500 earnings are expected to have risen 2.8 percent while revenue is expected to have gone up 1.9 percent.

Back in October, earnings growth for the fourth quarter was forecast up 9.9 percent.

In spite of the cautious outlooks, some analysts still see a good chance for earnings beats this reporting period.

"The thinking is you need top line growth for earnings to continue to expand, and we've seen the market defy that," said Mike Jackson, founder of Denver-based investment firm T3 Equity Labs.

Based on his analysis, energy, industrials and consumer discretionary are the S&P sectors most likely to beat earnings expectations in the upcoming season, while consumer staples, materials and utilities are the least likely to beat, Jackson said.

Sounding a positive note on Friday, drugmaker Eli Lilly and Co (LLY.N) said it expects profit in 2013 to increase by more than Wall Street had been forecasting, primarily due to cost controls and improved productivity.

(Reporting By Caroline Valetkevitch; Editing by Kenneth Barry)

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Comments (1)
TommyPaine wrote:
The Once and Future King

After the stock market surge of last week, some pros are suggesting that investors need to be cautious right now, because “earnings season” could bring some negative surprises. They may be right … poor Q4 earnings may pummel a few stocks. But that’s not the real risk; far worse for the stock market as a whole than some January earnings “misses” will be the coming fight in February and March over government spending. Then, House Republicans, feeling grievously wounded by their December defeat on taxes, will be heavily armed with the debt ceiling as a weapon. Those pundits who have been dulled by past last-minute solutions into thinking that our elected leaders would never really allow the government to default will be proven wrong … Because these conservative members of Congress come from districts in which Tea Party members and sympathizers predominate, they have nothing to fear from default and everything to fear from being seen as compromisers on government spending when they return home for the Easter break.

… then, if you think there will be clear sailing ahead for equity markets after Easter, just wait until April, May and June. By then the drums of war will be beating at a fever pitch. First will be the coming war with Iran. That one is inevitable. With that war we will see soaring oil prices, spiking Treasury prices and collapsing equity markets both in the U.S. and in Europe. Simultaneously, we will have to deal with the potential for conflict between China and Japan over the Diaoyu Islands. All that would be necessary to ignite that spark is a collision between two of their ships in the waters surrounding the islands, in which they are now engaged in a dangerous game of chicken. If a war were to break out between these two antagonists, it would make the conflict with Iran look like child’s play.

Finally, even if we avoid disaster over the debt ceiling (as well as the related fights over Appropriations and over confirmation of a new Treasury Secretary) and even if we avoid war both in Iran and in the South China Sea, we still won’t be out of the woods. Summer and fall will bring troubles of their own in the form of a full-blown resumption of the Eurozone crisis. That’s because the deal with Greece is going to start unraveling by then, Spain will be closer to the brink and Italy will start to face real problems refinancing its debt. Even if German Chancellor Merkel is able to throw resources at these problems to avoid a complete fiasco prior to German elections in the fall, these Eurozone difficulties are likely to increase market volatility much as they did throughout 2012. At the very least, the ongoing recession in Europe is going to start to bite into U.S. exports and corporate profits. And, as China gets deeper into the restructuring and rebalancing its economy as promised, it too is going to be less of a stimulus for growth in Europe and the U.S. In sum, revenues, earnings and stock prices will all suffer.

Put simply, those who have declared the bond bull market dead and crowned the equity market as the new king have done so very prematurely.

Jan 04, 2013 9:46pm EST  --  Report as abuse
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