Wall Street Searches for Growth as Earnings Season Begins

With the holiday weekend behind us it's time for Wall Street to buckle down for earnings season. As per tradition, Alcoa (AA) gets things started after the bell tonight when the Dow component is expected to report earnings of 8-cents a share on $5.92 billion in revenue compared to 6-cents on $5.96 billion in sales during the second quarter of 2012.

If Alcoa and other members of the S&P500 can achieve even a tiny bit of earnings growth this quarter most analysts would be thrilled. According to FactSet, analysts are expecting .8% total earnings growth in Q2, having taken down their collective estimated growth rate of 4.2% on March 31st. Materials, Information Technology and Industrial sectors have seen the most dramatic estimate reductions.
Mark Luschini of Janney Capital Management, says investors are likely to turn skittish as the bad news rolls in over the course of the next month. The best that can be said about the coming data is that expectations are low. In Q1 beating low expectations was good enough to drive stocks higher but eventually the stock market is going to need to see real growth. "The problem is the economy hasn't grown substantially from the first quarter so this could be a more valid reading going into the quarter than perhaps last quarter was," Luschini explains in the attached video.
The modest hope for Q2 is that the guidance provides evidence that the long-awaited recovery is starting to take shape. As is always the case in investing, "hope" is a terrible reason to buy stocks. Without strong guidance Luschini thinks the market could be in trouble.
"If they're [earnings] only growing in the low single digits that's hardly going to support the current multiple let alone provide any multiple expansion that would allow share prices to go up," Luschini cautions. In other words either guidance improves or stocks go lower. Regardless of how it plays out traders are advised to buckle-up; we're probably in for a bumpy ride.