Earnings Expectations

Q2 earnings season is upon us with Alcoa officially kicking it off on Monday.  For the S&P 500, analysts are predicting a 14% earnings growth rate and 11% revenue growth.  Interestingly, despite rising commodity prices and weak economic data in the last quarter, companies continue to paint a positive earnings picture and very few estimates have been revised.  From what I’m hearing, I expect investor reactions to mirror the Q1 season.  By that I mean forecasting and guidance will dictate market moves more than stated Q2 results. 

Last quarter was the first earnings season in a long while where stocks soared or struggled in the market on earnings day based on their own merits.  Previously, stocks were so correlated to one another that it almost didn’t matter what companies were saying.  Macro events always trumped and had the most influence over trading.  I think it’s a good sign that investors are starting to look at fundamentals again and this new attitude (assuming it holds true this reporting season) should be beneficial to those companies with differentiating stories.  The caveat is that macro events (Greek defaults, Chinese inflation, etc) are still top of mind on the Street, so any big world news will have an effect on individual stocks and markets overall. 

Bottom line?  Investors want to know that all the media hype about a slowing economy is wrong and will be looking for companies to demonstrate that to them.  I think we are all a little desperate for some good news after Spring’s weak  economic showing.  Thursday’s near 100 point gain driven by the better-than-expected ADP Employment report is a good example of this.  The ADP data is typically used as a directional  indicator for  the official monthly non-farm payrolls/unemployment report which comes out on Friday, but it doesn’t always have such market moving power.  I suspect positive outlooks from companies will have similar effects.