Skip to main content

In this file photo, traders work on the floor of the New York Stock Exchange.Richard Drew/The Associated Press

The first quarter earnings season boils down to these two questions: Will investors feel overjoyed at companies beating earnings expectations, or will they instead focus on lacklustre growth?

It is certainly likely that both questions will arise soon after Alcoa Inc. kicks things off on Tuesday evening. That's because companies and analysts have been slashing estimates for quarterly earnings, lowering the bar for companies to then clear. Beating estimates is often a trigger for stock rallies.

According to Bespoke Investment Group, nearly 62 per cent of U.S. companies beat expectations in the fourth quarter, and the one-day stock-price reaction averaged 0.8 per cent. Technology stocks enjoyed the highest so-called "beat rate" – 70 per cent topped expectations – and also the best reaction: The stocks gained an average of 1.4 per cent in the following day.

However, unless companies beat expectations by a wide margin this time around, the first quarter reporting season is likely to be a dud. Right now, analysts see earnings falling about 1 per cent over the first quarter of 2013, which means that it will take awfully big beats to come close to last quarter's 8.5 per cent earnings growth. Even a modest beat rate is likely to show that earnings growth is deteriorating.

Still, there's an upbeat interpretation here: Companies will blame the ferocious winter weather for their results, feeding anticipation of better earnings over the next three quarters.

"Given that weather has likely obscured the trend in growth, we think investors will look through this quarter's results and focus on forward-looking guidance as well as commentary on recent trends, now that the weather has begun to improve," said Savita Subramanian, equity and quant strategist at Bank of America, in a note.

She added that the results of early reporters – companies that released their earnings before the official start to the reporting season – help illustrate what is likely to follow. Twenty-one companies have reported their first quarter results, many of them highlighting the impact of the winter weather. However, 52 per cent beat earnings expectations, 57 per cent beat sales expectations and 52 per cent beat both.

"The proportion of top and bottom line beats is above last quarter's 42 per cent rate, and the highest we have seen from the early reporters since the first quarter of 2012," she said. "This suggests results may likely beat the lowered bar this quarter."

But this raises an additional question: Is the market already anticipating a strong beat rate, given the S&P 500's record high just last week? If it is, the lowered bar might not be low enough.

Follow related authors and topics

Authors and topics you follow will be added to your personal news feed in Following.

Interact with The Globe