Equities at earnings’ mercy

The ongoing fiscal impasse in Washington might make it hard to tell, but the latest U.S. earnings season, which unofficially kicked off Tuesday with Alcoa Inc. beating expectations, could still play a significant role in determining how equity markets fare over the next couple of weeks.

Average year-over-year earnings growth of just 3% is expected for S&P 500 companies for the three months ended Sept. 30, according to FactSet. That’s on par with second-quarter results and would mark the 10th quarter in a row that quarterly earnings grew less than 10%.

“A lot of companies are likely to come in with cloudy outlooks this time around and blame any distortions on the shutdown and political situation in the U.S.,” said Colin Cieszynski, a market analyst at CMC Markets Canada in Toronto.

“Because of this, traders may focus more on the results over guidance for an indication of what kind of momentum, if any, the economy had through the summer. “

Peter Buchanan, a senior economist at CIBC World Markets, said one potential concern investors have is revenue growth, which is expected to rise just 2% because oil prices were down appreciably during the quarter from the high levels of a year earlier.

On the other hand, investors should be encouraged that earnings guidance is fairly conservative, with negative outlooks outweighing positive ones by a record 5.8 to 1 for S&P 500 members.

“That raises the prospect for positive surprises, but we’ll likely have to get default fears put to rest before we see a renewed bid for U.S. stocks,” he said.

Pierre Lapointe, head of global strategy and research at Pavilion Global Markets in Montreal, said the low growth figures will make it difficult to attract interest from investors.

He does not expect realized earnings to be the market mover they usually are because of the fiscal drama ongoing in the U.S.

However, he does expect results to have some impact on stock prices.

In particular, earnings surprises, which he expects will be slightly more positive than usual, could move stocks on any given day.

He also anticipates many companies will warn investors that the current government shutdown/political uncertainty will impact their Q4 earnings negatively, leading to potential market weakness.

“This is even more likely considering that expectations for Q4 are very lofty,” he said.