Now that the markets managed to handle a weak December jobs number last Friday, the focus now turns to earnings season.
As is the custom, ALCOA, Inc. will be the first DOW component to report Q4 earnings after the close on Monday. This sets into motion the stream of earnings that will last the next 4-6 week. Technology stocks and financials are likely to be the keys to this earnings cycle yet again, because when those industries are healthy and growing, they tend to bring a lot of other sectors along for the ride.
Year over year earnings are expected to increase, but many will argue that the increased earnings are not from a growing economy, but rather the poor numbers from December 2008. The fact is that earnings expectations are still relatively modest, allowing companies to meet or exceed those expectations. We have seen earnings come in better than expected the last three earnings cycles, and there has been virtually nothing to suggest that this trend will be broken starting tomorrow.
Where you need to be focused is not necessarily the actual earnings numbers from last quarter, because after a day or so, that is old news. Stocks are always priced looking forward, so earnings guidance and forecasts will be key for companies. What do major executives at many of the Fortune 500 companies see for their businesses going forward? Do they anticipate increased growth or do they see potentially hiring more employees in 2010?
With tomorrow starting expiration week for January options, another layer of complexity is added to the pie. Now that we are in the New Year, the rat-race for returns has kicked back into gear and money-managers will be chasing returns wherever they can find them. A positive few weeks for earnings could mean another 3%-5% run in stocks by Valentines Day.
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