Earnings Season Almost Here....Prepare Yourself


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The market's been feeling very good lately, more than lately, since early October of last year.  The S&P 500 (Standard & Poor's index of their hand picked top 500 stocks) is up 28% since then.  Most investors rely on the S&P 500 as a good surrogate for the general market since it incorporates so many stocks.  Investors seem to think the best is yet to come, bidding up stock prices for many to levels that haven't been seen since 2008, before the crash.  Times are good.  Or so it seems.

Beware of quarterly earnings.  They're starting on April 10 with Alcoa, always the first of the big companies, and one of the Dow Jones Industrial Average stocks.  It's expected to report negative 4 cents according to the consensus of 18 analysts.  There's a wide range, from minus 17 cents to positive 8 cents.  It doesn't matter.  Last year in the first period, it reported 28 cents.  For the full year, consensus from 21 analysts is for 49 cents compared to 72 cents in 2011.  And that's just the beginning.

In general, the S&P is expecting full year earnings growth of 5%.  And that includes 2 stellar performers: Apple and Caterpillar.  Projections for the first quarter are for profits to rise by .5% (that's 1/2 of 1%).   In the last quarter of 2011, 63% of companies reporting earnings beat anlaysts' forecasts.  But many of the estimates were based on lowered expectations by the analysts. 

They learned a lesson last quarter and many have adjusted to the new economic realities.  If they were embarrassed enough, they may have raised their forecasts to a level that it's more rosy than is real.  If that's the case, investors usually vote with their "Sell" orders if a company doesn't meet or beat analysts' expectations.  (For more stock ideas, see our Website:www.theonlineinvestor.com)

With that in mind, the best sectors, according to analysts should be industrials (10% growth), then IT (information technology) with 4% growth, and consumer discretionary, 3% higher.  The weakest sectors most likely will be materials (down 15.5%), telecom (down 14%) and utilities (down 4%) according to Sam Stovall, S&P's chief equity strategist.  In all, 6 out of 10 S&P sectors are likely to show earnings declining.

Many companies get a jump on the bad news and pre announce, arming investors with the bad news ahead of the official announcement.  As of this writing, the level of negative preannouncements is at its highest level since March of 2009 when the market was at its low.

Here are what's expected from the Dow Jones Industrial Average stocks:
(You can find earnings estimates at Yahoo!Finance in the Analysts Estimate link, on the left when you enter a stock's symbol.)

             Expected                              Last Year In First Quarter

AA:            -  .04                                                   .28
AXP:           1.00                                                  .97
T:                   .57                                                   .57
BAC:             .11                                                   .17
BA:                .92                                                   .78
CAT:            2.12                                                 1.84
CHX:            3.03                                                 3.09
CSCO:          .47                                                    .42
KO:               .88                                                     .86
DD:              1.54                                                 1.52
XOM:            1.95                                                 2.14
GE:                 .33                                                    .33
HPQ:              .91                                                   1.24
HD:                 .61                                                     .50
INTC:             .50                                                      .56
IBM:             2.64                                                   2.41
JNJ:              1.35                                                  1.35
JPM:             1.12                                                  1.28
KFT:               .56                                                     .52
MMM:            1.48                                                 1.49
MCD:             1.23                                                1.15 
MRK:                .97                                                  .92
MSFT:             .58                                                   .61
PFE:                .57                                                   .60
PG:                  .93                                                   .96
TRV:              1.49                                                 1.89  
UTX:               1.18                                                1.11
VZ:                    .59                                                  .51   
WMT:             1.04                                                  .98
DIS:                   .61                                                 .49

As you can see there aren't many with a large improvement and many with lower numbers.  That's how it is after a terrible economic slowdown: the early quarters of a recovery show great growth, then it gets harder.  Investors often bid up stocks in anticipation of better and better growth.  It seems as if caution is warranted here as the market may be ahead of earnings.  If there's any disappointment in actual earnings compared to those forecast, it may not be pretty as investors take their recent gains and move on.  Beware in here.

- Ted Allrich
March 20, 2012

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Investing Ideas , Stocks

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Ted Allrich

Ted Allrich

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