Waiting for the Earnings Season

The five-day old market rally appears to be stalling today on Europe-related news, this time concerning the legislative approval for expansion of the lending capacity of the European Financial Stability Facility (EFSF). In the latest of the national Euro-zone legislative approvals, parliament of the Slovak Republic is scheduled to vote on the EFSF, and the outcome of the vote is reportedly far from certain.

But the suspense surrounding the Slovak vote is perhaps just an excuse for the market to take a breather. After all, the market has gained almost 9% in the last 5 trading sessions and no one would begrudge the market a pause after such a sprint. This is particularly so given the paucity of hard economic news today.

Except for the release of the minutes of the last Fed meeting later today, there isn’t anything notable on the economic calendar. There is some interest in the Fed minutes, particularly the discussion surrounding the launch of Operation Twist, which may provide clues by the Fed’s future course of action.

The biggest event of the day is the start of the third quarter reporting cycle with the release of Alcoa’s (AA) results after the market close. Chevron (CVX) will also be providing a quarterly update after the close today. Later this week, we get results from Pepsi (PEP), Google (GOOG) and J.P. Morgan (JPM). Estimates for Alcoa’s quarterly earnings have been steadily coming down in recent weeks and currently remain roughly 26% below the level of just two months ago. Alcoa has produced a negative surprise in each of the last three quarters, but it may be able to reverse that trend today given the low expectations.

Alcoa’s results may not tell us much about the health of overall corporate profitability, but a lot is riding on the quality of this earnings season. Of particular significance is the lack of conviction around current earnings expectations for the next four to six quarters. This is affecting investors’ ability to arrive at a fair value for the market. The hope is that comments from management teams in this reporting cycle will lift the uncertainty surrounding earnings expectations, which would be a major positive for the market.

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