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As Earnings Reports Start Coming In, Investors Remain Cautious, Uncertain


A large number of factors have left the waters murky at best this earnings season.

The question on all minds now is whether what's to be an underwhelming level of earnings growth for the fourth quarter represents some kind of trough. As Jeff Kleintop, market strategist at LPL Financial (NASDAQ:LPLA), points out, if fourth-quarter profits do prove to be the lowest in any quarter of 2012, this will be both unusual and unwelcome. Traditionally, he says, when the economy is growing the fourth quarter often is the period in which companies report the strongest earnings.

At the moment, Wall Street is predicting that companies in the S&P 500 index will report earnings growth of about 10% in 2013. That's not dramatic, but better than the 3.7% or so that some pundits are saying will be the case in 2012. But will those forecasts stay in place, or will drama surrounding the debt ceiling negotiations or other events throw that into question by weighing on revenues or margins?

Certainly, David Bleustein, head of research at UBS Investment Research, suggests that the bulk of corporate earnings guidance in the coming weeks is likely to be negative, although perhaps less so than in recent quarters. (Companies typically use their quarterly earnings reports and the inevitable conference calls that follow to gently "guide" analysts' future profit expectations higher or lower.)

Some of the same factors that may constrain profit growth may also limit the ability of the market to deliver any expansion in the price-earnings ratio for the S&P 500 – and thus higher share prices. Confidence remains fleeting and elusive; welcome when it appears but hard to sustain for any length of time. Nonetheless, with many blue-chip companies trading at relative discounts to their historic valuations while offering higher yields than they have in many years, investors may well opt to seize hold of any good news and respond by driving the stock prices of individual companies significantly higher. Get ready for a bumpy ride.

Editor's Note: This article by Suzanne McGee originally appeared on The Fiscal Times.

For more from The Fiscal Times:

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Apple's Tim Cook Meets With China Mobile Chairman in Beijing

Follow The Fiscal Times on Twitter @TheFiscalTimes.
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