So far this year, U.S. stocks have been dragged down by a flashback to Cold War-style posturing from Russia, a mini-crash in formerly high-flying Internet and biotech names, and scares related to the Federal Reserve's plans to cut back its stimulus programs.
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Now, a potential new worry is the dearth of profit growth expected from companies in the Standard & Poor's 500 stock index in the just-ended first quarter, due in large part to business disruptions caused by nasty winter weather.
The unofficial start to the earnings season kicked off after the closing bell, with aluminum maker Alcoa topping earnings forecasts but coming in light on revenue. Alcoa shares rose 1.8% in after-hours trading to $12.77.
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Overall, analysts are expecting S&P 500 profits to grow at a puny 1% pace vs. the same period a year ago — and down sharply from a projected 6.5% on Jan. 1, according to Thomson Reuters I/B/E/S. That puts corporate profitability on track for its most feeble growth since the third quarter of 2012, when growth was an anemic 0.1%, according to David Aurelio, research analyst at Thomson Reuters.
How the stock market reacts to earnings season will depend on the answers to a few key questions:
1. Will investors give a "weather pass"? It's harder to sell cars, clothes and computers when shoppers are snowed in. But weather woes are temporary, and Wall Street looks forward not back when pricing stocks. It won't be a surprise if Wall Street gives companies a pass, just as they looked past weak economic data earlier this year.
"Given that the weather may have obscured growth trends, investors may be more likely to look through the first-quarter results and focus on forward-looking guidance," Savita Subramanian, equity and quantitative strategist at Bank of America Merrill Ly! nch, told clients in a report.
2. Will CEOs offer "sunny" guidance? "We'll be listening closely," said Subramanian, adding that any signs companies plan on spending more money to grow their businesses "would bode well for corporate confidence and the overall health of the economy."
Wall Street is expecting the economy to pick up speed in coming quarters, putting profit-growth projections of roughly 10% per quarter in the second half of the year within striking distance.
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3. Will companies hurdle "lower bar"? The odds of the S&P 500 clearing the 1% growth hurdle are high. Since the second quarter of 2012, companies have topped analysts' profit-growth forecasts by 2 to 4 percentage points, according to Thomson Reuters.
"Analysts have again set the bar manageably low for the S&P 500 to comfortably hurdle," said Andrew Burkly, portfolio strategist at Oppenheimer.
And given the fact analysts have slashed their profit projections more than normal, upwards of two-thirds of S&P 500 companies will beat by an average of 3 to 5 percentage points, predicts David Bianco, chief U.S. equity strategist at Deutsche Bank.
"These beats will prevent first-quarter earnings growth from being flat," says Bianco, adding that S&P 500 profits could finish up 4%.
However, he says there's a risk of the stock market suffering a 5% to 9% drop if investors "doubt stronger sales growth," or if the yield on the 10-year Treasury, now 2.68%, quickly jumps to 3.25% if the economy and job growth mount an overly strong rebound.
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