5 trends that will shape this earnings season

Are companies galloping into the year's final quarter -- or limping to the finish? Here's what to watch.

By StreetAuthority Oct 1, 2013 10:54AM
Stock market © Zurbar/age fotostockBy David Sterman

Do earnings matter? It seems as if the market moves higher with each passing quarter, even as year-over-year earnings growth has markedly slowed in recent quarters. Simply put, it's easy to assume that investors aren't paying attention to quarterly updates.

But earnings do matter, of course. They've been just good enough to keep from spooking investors, and in the next few weeks, expect more of the same.

There are few major headwinds in place to dampen quarterly profits right now. If recent history is any guide, the vast majority of companies in the S&P 500 ($INX) will meet or slightly beat third-quarter sales and profit forecasts.

Yet this is no time to become complacent. Within specific industries, investors will be paying very close attention to the demand environment. For example, homebuilders appear to be holding up well enough, considering that mortgage rates have begun to rise. Will the leading builders change their tune about solid foot traffic in the months ahead?

Here are five other trends you'll want to track during the coming earnings season.

1. Where's the consumer?
Many retailers appear to be stalling out, and analysts are starting to lower earnings forecasts for consumer-facing companies. Macy's (M), for example, reported a weak fiscal second quarter, highlighted by a modest drop in same-store sales, and recent Johnson Redbook retail spending surveys haven't shown any improvement. In a similar vein, Carnival Cruise Lines (CCL) is having a hard time drumming up new bookings and has resorted to heavy discounting.

Though many retailers won't report fiscal third-quarter results until mid-November, we'll hear from many other consumer-facing companies in October. Tepid results from consumer discretionary firms now will raise serious concerns about the upcoming holiday season.

2. Headwinds for emerging markets?
Leading emerging markets have endured a tough summer, thanks to falling commodity prices, rising domestic unrest, and central bank monetary pressures. Any U.S. companies with considerable emerging-market exposure are bound to dampen deliver bad news on the earnings front. The fact that many local currencies have lost a lot of value against the dollar likely implies a considerable drag from foreign exchanges as well.

The market has been rewarding companies that have a primarily U.S. focus, and that trend may continue through earnings season as well.
3. Can internet stocks justify their values?

The top 10 or 15 Internet-related stocks are on fire. It's not just Facebook (FB). Yahoo (YHOO), Priceline (PCLN), Netflix (NFLX), Akamai (AKAM), Pandora (P), Apple (AAPL) and Salesforce.com (CRM) have all seen their shares rise 25% or more in the third quarter, adding tens of billions in market value. Investors will be expecting these companies to deliver terrific results to justify what are, in some cases, nosebleed valuations.

You could argue that the impressive stock gains are the result of investors' new focus on long-term business trajectories, and not the result of recent quarterly results. In effect, the sentiment has changed, but not the fundamentals. Yet any signs of slowing growth in internet ad revenues, e-commerce purchasing, or digital entertainment trends, and investors will be awfully tempted to lock in profits.
4. Washington's economic impact
As of this writing, thousands of government employees are set to be furloughed due to the budget impasse. Even if that issue is resolved fairly quickly, the debt ceiling limit will be reached a few weeks later, which could create another crisis. Considering how large the government stands as a leading customer to many companies, and considering the likely curtailing in spending by anyone who works for the government, we're bound to be hearing about it on upcoming conference calls.

There's a real possibility that the government's budget issues will shave 0.5% or 1.0% off fourth-quarter GDP. Listening in on the conference calls to see how companies are affected will be a useful exercise this quarter.
5. Airlines: flying too high?
In a similar vein, investors have been really warming up to airline stocks: The AMEX Airline Index rose 17% in the third quarter and is up by more than 60% over the past year. As a result, many airline stocks are now trading for close to 10 times forward earnings, which is a historically high multiple for this boom-and-bust industry.

Yet investors may be overlooking the fact that air travel is slowing. As the International Air Transport Association (IATA) noted this month: "Cargo growth has not materialized. Emerging markets have slowed. And the oil price spike has had a dampening effect." That's not to say that this industry is headed for trouble, but we may be hitting a cyclical peak. Delta (DAL), for example, is expected to boost profits just 3% in 2014 (to $2.90 a share), as air travel demand and pricing flatten.
Risks to consider: Companies have moved away from pre-reporting bad results at the end of the quarter. They're waiting instead until the scheduled earnings date to deliver any bad news. That can lead to sharp drops if investors feel misled -- and in this ever-rising bull market, the punishment for any shortfalls may prove to be more severe than usual.

Action to take:
Recent earnings seasons have been fairly uneventful, as many companies deliver results that are unimpressive but just good enough. We'll need a repeat performance if stocks are to hold current levels, especially as the budget noise out of Washington rises to a fever pitch.

David Sterman does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.

More from StreetAuthority:

Oct 1, 2013 12:24PM
Where's the 'consumer'???? You have to be joking, right? Or are you just another head-buried-in-the- sand market shill touting the non-existent 'recovery', hoping we pony up and start spending? Well, Virginia, the 'consumer' is broke, out of work, buried in debt and absolutely choked by inflation. So we don't, can't believe the lies about this contrived 'recovery'. This time boys, you are going to have to find somebody else to 'consume' because we can't afford to. How about you hit up the 1% that are the only ones prospering in this economy; they can certainly afford all the junk retailers have; let them carry the damn ball for a change.
Oct 1, 2013 3:17PM

So happy the gov "shut down"



Oct 1, 2013 2:29PM
Lets start with the truth.  The majority of the reporting companies will report decreased revenue/sales, just like they did in the second quarter resu.lts.  Then, they will show a profit, as predicted by the market or better, because they have cut costs, used accounting gimmicks and laid off employees.  What nobody seems to realize is you can only lay off so many employees, cut only so many costs and utilize only so many accounting gimmicks, before you have to show the true accounting numbers.  The smoke and mirrors will end, as well as the Fed printing of the funny money.  Then, the over-valued market will come down to reality, which will hurt a lot of people.  But, don't say you haven't been warned.  
Oct 1, 2013 3:45PM
HERE WE GO big money manipulating the  market   smoke and mirrors . they do  not want to admit  the  feds  and the government  spending  is the only thing keeping  us afloat  i hope we push this until the debt is  due.
Oct 5, 2013 7:21PM
There likely won't be a 4th Quarter in America... if the two insanely ridiculous out-of-touch political parties don't do us in... more than $632 TRILLION in derivatives will. Every game token you think you make in stock and bond investing is a debt owed by future America. If $85 Billion in QE goes into the markets, why does less than $45 Billion in GDP only come out? The Chicago Mercantile Exchange ALONE generates $100 in DEBT for every $1 in stock gain. Essentially those Maserati-driving fools go to work Monday through Friday to destroy America through financial strangulation. How much longer do you pretend your I-Phone Kool Aid existence is fine and tomorrow's overwhelming indenture isn't going to happen? OF COURSE IT IS. You tap on a handheld device all day. The last generation built a REAL economy. What does your tapping do besides drain your brain?
Oct 6, 2013 7:44AM
Oct 1, 2013 12:37PM
There are two main trends shaping this earnings season, Stock buybacks and even lower borrowing cost for Solid, well run Corporations. We are effectively having the biggest refinance of Debt for Corporations, in Modern History. The 1% that don't need lower borrowing are getting all the low cost money they WANT while the Consumers that really needs lower borrowing cost can't get a loan. Most that do aren't seeing the lower interest rates that the Global FEDS have bestowed to the 1%.

Carl Icahn wants Apple to Borrow $150Billion dollars just to do a Stock Buyback. Carl Icahn wants what's best for the 1%, not what's best for Apple and it's employees. Carl Icahn is a self absorbed greedy you know what. Wall Street talking heads love him. No real shock there.

Oct 1, 2013 1:30PM

Yes Dave you are more than Correct ...


And as far as any buybacks by Apple....Their "off shore" Accounts could just about accomplish the task..??

But believe it would induce repatriation of Funds and taxes applied...??

Oct 6, 2013 4:18PM
Obama team coming down hard on the American working people, not getting better until he is gone.....sad but true and it will be hurting you.
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