First-quarter expectations depressingly low

Happy days are not yet here again.

By Jonathan Berr Apr 9, 2012 3:38PM
Investors awaiting the start of earnings season should grab a fistful of Prozac and make sure their therapists are on speed dial. The outlook is that depressing.

"Earnings Season: Don't Get Your Hopes Up," reads the headline in The Wall Street Journal. CNN/Money said the numbers "won't be pretty" while the Associated Press said they could derail the market's climb.

Post continues below.
The skepticism is understandable given that analysts have been ratcheting down earnings expectations for months.

According to S&P Capital IQ data cited by the Journal, quarterly earnings are expected to grow an average of 0.95% -- the lowest rate of year-over-year growth since the Great Recession ended. Just last September, analysts were expecting 10% growth. FactSet is forecasting a decline of 0.1%. If this forecast proves accurate, that would end nine straight quarters of gains.
Companies are more cautious recently. Last month, the fewest numbers of companies issued earnings guidance since 2000, according to a Bank of America Merrill Lynch note quoted by the Journal. Nonetheless, signs abound that the economy continues to rebound, albeit at a painfully slow rate.

Ford (F) last week raised its forecast for 2012 U.S. auto sales to between 14.5 million and 15 million vehicles, up from an earlier projection of between 13.5 million and 14.5 million. That's good news for Alcoa (AA), which kicks off earnings season Tuesday. Automakers account for roughly 25% of aluminum shipments while the construction industry, which will also be helped by an economic rebound, accounts for roughly 12%.

Consumer confidence has climbed to a four-year high, which should be good news for retailers such as Wal-Mart (WMT), Macy's (M) and Target (TGT). March retail sales rose 4.3%, better than analysts had expected. Warm spring weather will boost sales for Home Depot (HD) and Lowe's (LOW) along with the small general contractors who patronize the home improvement chains.

Businesses eased up on their hiring last month for reasons that are not immediately clear.  Perhaps the job market got ahead of itself. As Reuters noted, the drop in the unemployment rate to 8.2% is not a good thing because the size of the workforce dropped as more workers either quit looking for work or retired. A disappointing jobs report is not great, but it isn't the end of the world either.

"One disappointing jobs report is not reason to panic, but it will dampen some of the optimism about the strength of the recovery this year," says Nigel Gault, chief U.S. economist at IHS Global Insight, in a press release. "Our read is that March is understating the underlying improvement in the labor market, while January and February overstated it."

All hope isn't lost for the housing market, a key to the economic recovery, either. Though CoreLogic's home price index fell 0.8 from January to February, its seventh straight decline,  when distressed sales were excluded, the metric rose 0.7%.

One of Warren Buffett's most famous quotes urges investors to "be fearful when others are greedy and greedy when others are fearful." That's wise advice for investors to consider whenever they hear conventional wisdom about the market will soaring or crashing.

--Jonathan Berr is long Target.
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Apr 9, 2012 3:46PM
My hopes have not been up for a long time.  It has been one long line of disappointments.  Smile
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