Focusing on Three Themes

Alcoa (AA) will kick off the third-quarter reporting season when it delivers its earnings results on Wednesday. While all earnings seasons are critical for investors and the markets, I think this one will be one of the most closely watched quarters in quite some time. I also believe it will determine the direction of the market in the weeks ahead. Equities currently feel like they are at an inflection point. The market has become more volatile since the S&P 500 closed above the magical 2,000 level. With the Federal Reserve about to end quantitative easing, I believe investors will be closely be tuned in to this quarters reports. Here are a few of the key themes I will be looking at within results. Europe I have penned a couple of articles recently on the impacts of the strengthening dollar especially against the Euro. The greenback gained more than 7% against its European cousin in the third quarter and continues to strengthen. A variety of American multinationals should have significant currency impacts to earnings reported this quarter. I expect McDonald's (MCD), IBM (IBM) and others to note currency headwinds within their results. I could see overall earnings estimates for the S&P 500 be taken down as the extent of the stronger dollar becomes more known. I will also be listening to what these companies and others, such as Priceline (PCLN) and General Motors (GM) are seeing with European demand. The International Monetary Fund (IMF) just lowered its GDP growth forecast next year for Germany, the economic engine of Europe. Industrial demand also was just reported to drop in Germany by 4% during August, which would be the deepest decline since 2009. I am very concerned that Europe is on the precipice of slipping back into a recession. I will be looking for some reassurance in these reports that those worries are misplaced. Energy In recent months, due to falling oil and natural gas prices, the market has treated the energy sector like an ugly stepchild. I have been adding incrementally to some of the small exploration-and-production companies within my portfolio that have been creamed lately, including Abraxas Petroleum (AXAS) and Emerald Oil (EOX). It will be interesting to see if their huge production growth can overcome falling oil prices and keep moving earnings forward. I will also be listening to see to what extent the fall in energy prices is starting to impact capital budgeting plans. This will be critical to energy services firms. For example, Halliburton (HAL) has seen its stock price decline significantly recently -- even as the consensus earnings estimates for the firm are roughly where they were three months ago. Frac sand plays such as U.S. Silica Holdings (SLCA) have also been hit hard in recent weeks. Are these concerns warranted or overblown? Third-quarter results and guidance should answer this question. Retail Finally, and hopefully ending on a more optimistic note, I will be watching the retail sector quite closely. Strong job growth, falling gas prices and a stronger dollar should all be tailwinds for retailers. I will be listening closely to reports from The Gap (GPS), Macy's (M) and others for news of increasing demand. I think results and forward guidance should be strong in the sector and I have added some funds to this space recently. I am hoping that the upcoming results will confirm this move was prudent. The third-quarter earnings season will provide myriad data points on the strength of the economy and where the market goes from here. It is going to be a very busy few weeks of digging through results for clues on these themes I am closely watching.

Focusing on Three Themes

As the third-quarter earnings results pore in, I will be closely monitoring Europe, energy and retail.

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