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Earnings Conundrum

April 9, 2012 – 5:05 pm

Earnings season begins with Alcoa reporting after hours on Monday. The experts expect a loss not a gain which puts a negative stamp on the upcoming flood of numbers for all the companies. Over the past three months earnings estimates have been ratcheting downward. There will be little or no growth of earnings this quarter. So how has the market done so well in the face of reduced earnings estimates?

It all comes down to the future earnings outlook. Those same experts that have been guiding lower for first quarter numbers are also predicting a sharp rebound for the rest of the year. Traders and investors have, as they always do, taken the future outlook and priced in those possible gains rather than reacting to the most recent past quarter. Certainly, there will be disappointments even in the downward revised numbers but there will also be many numbers that beat their lowered estimates.

Since the stock market reacts to future possibilities instead of current facts it is important to listen to the CEO’s statement about earnings and growth. If they are generally downbeat about the coming quarters the market will react poorly. If they speak in terms of growth in future orders and an uptick in the sentiment in their markets then the rally will continue.

Of course at the same time economic statistics can upset the apple cart like the jobs numbers reported last Friday. However, are not jobs a factor in corporate earnings? Without people earning money our economy sinks and profits go with it. It is all related.

Good Trading
Steve Peasley

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