RPT-Wall St Week Ahead: 'Cliff' concerns give way to earnings focus

Reuters Middle East

NEW YORK, Jan 6 (Reuters) - 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

two months.

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

other countries.

"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

New York.

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

conference call.


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.

(Wall Street Week Ahead moves every Sunday. Comments or

questions on this one can be sent to


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