Earnings could put damper on stock run-up

Brendan Mcdermid / REUTERS

By longstanding tradition Alcoa, with its stock symbol AA, is the first big company to report its earnings each quarter.

By Roland Jones

The stock market is off to a fast start so far this year, but now investors are bracing for some bad news.

Beginning Tuesday, when Alcoa kicks off the earnings season after the close of trading, the nation's biggest companies will begin to? report on their profits for the first quarter, and the overall growth rate is likely to be the slowest in three years.

Even after a sell-off Monday the broad Standard & Poor?s 500 stock index is up 10 percent so far this year and has doubled since hitting a bear-market low in March 2009. Share prices have been driven higher as companies have cut costs and repaired their balance sheets after the financial industry meltdown and deep 2007-09 recession.

But that corporate frugality may have reached its limits, meaning profit growth may have peaked in the second half of last year, analysts say.

?It?s not that earnings won?t go up any more; it?s just that the growth rate is slowing,? said Hugh Johnson, chief investment officer of Hugh Johnson Advisors in Albany, N.Y.

First-quarter earnings are expected to rise an average 3.2 percent for S&P 500 companies, according to Thomson Reuters, compared with 9.2 percent in the fourth quarter and almost 19 percent in the first quarter of 2011, compared with the year-earlier periods.

Earnings were so terrible in 2008 and 2009 that it wasn?t hard for companies to post year-over-year earnings gains, Johnson said. Now, a few years on from the downturn, growth rates are not as arresting, he added.

?This slower growth is going to be a disappointment to Wall Street,? Johnson said. ?It tends to be impatient and wants stronger growth, but that?s not the way the world works.?

With the market up a sharp?26 percent since Oct. 3, and having seen its best first-quarter gain in 14 years, stocks face other?headwinds besides decelerating earnings growth.

These include the possibility of slower growth in China, Europe and here at home. Last Friday?s March jobs report, which showed non-farm payrolls grew by a smaller-than-expected 120,000 jobs last month worried investors.

?The jobs report really sobered us up,? Johnson said. ?The market has had a really good run since early October, and so everything has to go well for that rally to continue. But unfortunately things are starting to not go well, and it confirms what a lot of us were saying: that the market has been getting ahead of itself.?

"If the recent pattern persists, the market will be more discriminating than earlier in the rally, rewarding strong performers who deliver confident guidance, and punishing those who miss estimates and offer cloudy forecasts,"? Ameriprise Financial chief market strategist David Joy said in a note.

Investors who are looking for a reason to protect their gains might bear in mind the old stock market adage ?Sell in May and go away,? made famous by the Stock Trader?s Almanac, which details stock market trends.

The saying refers to the fact that stocks tend to perform poorly from May to October compared with the November to April period. Stock investors who believe they can time the market perfectly may want to avoid investing until fall.

Besides Alcoa, other companies scheduled to report earnings this week including Google, JP Morgan and Wells Fargo.

Reuters contributed to this report.

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