What to Expect This Earnings Season

 | Jul 13, 2012 | 1:30 PM EDT
  • Comment
  • Print Print
  • Print
Stock quotes in this article:










We head into this earnings season with more uncertainty and a greater likelihood of earnings disappointments and cautious guidance than we have seen during the past few quarters. At the beginning of this week, The Wall Street Journal reported that 42 companies had already announced that their quarterly results would be lower than previously expected. Since then, Dover (DOV), Advanced Micro Devices (AMD), Cummins (CMI) and Applied Materials (AMAT) have been added to the list.

A tough earnings season is a virtual certainty. How the overall market will react and how individual stocks will react is a lot less clear. So far, the results have been mixed but more skewed to a negative stock price reaction.

Here are some expectations for the current earnings season. The stock implications are going to be a lot more complicated, as many stocks have already sold off on expectations of a weak quarter. And, as we will discuss below, perspective will be all-important for investors as they digest and decide how to react to the news.

Overall, it will likely be a mixed quarter, with a greater number of companies coming in at the low end of expectations or missing than in the past few quarters, and guidance from the majority of companies will likely be cautious or conservative.

Multinational companies will face a number of headwinds:

  • Strong U.S. dollar vs. euro will hurt companies with significant European business.
  • With European business slower than expected, overall revenue and earnings will be negatively impacted.
  • Growth is slowing in China.

Currency translation will negatively affect global industrials, technology firms, pharmaceuticals and medical products and consumer product companies.

Domestic-oriented companies have the greatest likelihood of meeting or exceeding expectations, as the U.S. economy has been relatively better than most other areas of the world.

Within the financial arena, low interest rates will hurt net interest margins and have a direct negative impact on companies that earn a fee from their money-market business, such as the trust and processing banks and the retail brokers. Also, capital market activity was weak in the quarter, which this should negatively impact earnings.

On the positive side for financials, credit will continue to improve, and mortgage and real estate will go from being a significant negative to being neutral to modestly positive. Mortgage origination is picking up in a meaningful way and will be a positive factor for companies such as Wells Fargo (WFC), which reported earnings this morning that were a penny better than expectations.

In the past few quarters, financial stocks have declined or have had only modest gains after announcing earnings (even when they beat numbers,) and we expect similar action this quarter.

Other sector/industry expectations:

  • Industrial and technology stocks will have a tougher quarter, driven by weaker international end demand.
  • Consumer products and pharmaceutical stocks will face a currency headwind.
  • Utility and domestic businesses should be in line with expectations.
  • Retail will be company-specific.
  • The oil sector should be mixed, with refiners and integrated oil companies having good quarters and drillers facing some company-specific issues.

While the short-term picture looks bleak, it needs to be put into perspective.

While things are slower than expected, revenue and earnings are still growing, cash flows are strong, and balance sheets are in the best shape they have been in for years. Going forward, earnings are expected by and large to continue to grow but at significantly slower rates than the recent past. This compares pretty favorably with Europe, which is largely in recession.

Also, valuations have already been pretty low (especially considering the rock-bottom interest rate environment), so the likely negative short-term market reaction would only extend the disconnect between business performance and stock prices.

While we might have to wait for greater comfort from Europe and more clarity on U.S. tax and fiscal policy direction, we believe that the market is setting the stage for a significant rebound either later this year or early in 2013. This should likely occur as companies once again will be perceived as having been overly punished because of macro and global concerns.

We would use the likely market weakness that this earnings quarter will bring as an entry point into many locked and loaded companies. As earnings season unfolds, we will be looking at some of the particularly promising individual opportunities.

Columnist Conversations

we like this chart here, it appears ready to move higher. BOUGHT BZUN OCT 35 CALL AT 3.40
Large-cap, high-quality McKesson (MCK) is too cheap now, at $147.51 or so. The stock hit $243.60 more than 2.5...
View Chart »  View in New Window » View Chart » 



News Breaks

Powered by


Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.