Wall Street Prepares to Celebrate Blah Earnings

The stock market is down again today but nothing too severe. What’s really interesting is how far the VIX has fallen. It’s been below 14 recently. It seems that once the Fiscal Cliff episode ended, that trade simply collapsed.

Earnings season begins today when Alcoa reports its fourth-quarter earnings. For the broader market, earnings growth is expected to increase by 2.8% from a year ago. That’s not great, but it’s the best growth rate in three quarters.

What’s disturbing is how far expectations for Q4 have fallen. Paul Vigna at the WSJ notes that at the end of September, the Street was expecting Q4 earnings growth of 9.2%. That’s been cut by two-thirds.

Estimates for the first half’s numbers are already coming down as well. Profit growth for the first quarter is now estimated to be about 2.5%, down from a 5.3% estimate at the end of September, and the second-quarter’s forecast has come down to 6.7% from 9.1%.

One curious thought to ponder is the trend in earnings multiples. In October 2011, the P/E Ratio for the market reached a multi-year low. Since then, it’s started to creep higher.

As an investor, it’s unwise to assume earnings multiples will rise. However, historically P/Es have to tended to move in large, multi-year trends. Meaning, if they’re rising, they’ve tended to rise for a long time. When they’ve fallen, they’ve continued to fall for many years. Was a major low reached 15 months ago? I just don’t know.

Posted by on January 8th, 2013 at 10:33 am

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