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NEW YORK Jan 6 Investors' "fiscal cliff"
worries are likely to give way to more fundamental concerns,
such as earnings, as fourth-quarter reports get under way this
Financial results, which begin after the market closes on
Tuesday with aluminum company Alcoa, are expected to be
only slightly better than the third-quarter's lackluster
results. As a warning sign, analysts' current estimates are down
sharply from what they were in October.
That could set stocks up for more volatility following a
week of sharp gains that put the Standard & Poor's 500 index
on Friday at the highest close since Dec. 31, 2007. The
index also registered its biggest weekly percentage gain in more
than a year.
Based on a Reuters analysis, Europe ranks among the chief
concerns cited by companies that warned on fourth-quarter
results. Uncertainty about the region and its weak economic
outlook were cited by more than half of the 25 largest S&P 500
companies that issued warnings.
In the most recent earnings conference calls, macroeconomic
worries were cited by 10 companies while the U.S. "fiscal cliff"
was cited by at least nine as reasons for their earnings
"The number of things that could go wrong isn't so high, but
the magnitude of how wrong they could go is what's worrisome,"
said Kurt Winters, senior portfolio manager for Whitebox Mutual
Funds in Minneapolis.
Negative-to-positive guidance by S&P 500 companies for the
fourth quarter was 3.6 to 1, the second-worst since the third
quarter of 2001, according to Thomson Reuters data.
U.S. lawmakers narrowly averted the "fiscal cliff" by coming
to a last-minute agreement on a bill to avoid steep tax
increases last week - driving the rally in stocks - but the
battle over additional spending cuts is expected to resume in
Investors also have seen a revival of worries about Europe's
sovereign debt problems, with Moody's in November downgrading
France's credit rating and debt crises looming for Spain and
"You have a recession in Europe as a base case. Europe is
still the biggest trading partner with a lot of U.S. companies,
and it's still a big chunk of global capital spending," said
Adam Parker, chief U.S. equity strategist at Morgan Stanley in
Among companies citing worries about Europe was eBay
, whose chief financial officer, Bob Swan, spoke of
"macro pressures from Europe" on the company's October earnings
One of the biggest worries voiced about earnings has been
whether companies will be able to continue to boost profit
growth despite relatively weak revenue growth.
S&P 500 revenue fell 0.8 percent in the third quarter for
the first decline since the third quarter of 2009, Thomson
Reuters data showed. Earnings growth for the quarter was a
paltry 0.1 percent after briefly dipping into negative
On top of that, just 40 percent of S&P 500 companies beat
revenue expectations in the third quarter, while 64.2 percent
beat earnings estimates, the Thomson Reuters data showed.
For the fourth quarter, estimates are slightly better but
are well off estimates from just a few months earlier. S&P 500
earnings are expected to have risen 2.8 percent while revenue is
expected to have gone up 1.9 percent.
In October, earnings growth for the fourth quarter was
forecast up 9.9 percent.
In spite of the cautious outlooks, some analysts still see a
good chance for earnings beats this reporting period.
"The thinking is you need top-line growth for earnings to
continue to expand, and we've seen the market defy that," said
Mike Jackson, founder of Denver-based investment firm T3 Equity
Based on his analysis, energy, industrials and consumer
discretionary are the S&P sectors most likely to beat earnings
expectations in the upcoming season, while consumer staples,
materials and utilities are the least likely to beat, Jackson
Sounding a positive note on Friday, drugmaker Eli Lilly and
Co said it expects profit in 2013 to increase more than
Wall Street had been forecasting, primarily due to cost controls
and improved productivity.
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