Earnings season setting up to be a disappointment

Good morning,

  • Friday's sell-off on Wall Street driving European futures lower;

  • Earnings season setting up to be a disappointment;

  • Economic calendar not offering much today;

  • Investor sentiment towards eurozone seen hitting three year high.

Friday's late sell-off on Wall Street is driving losses in Asia and Europe at the start of the week. As it stands, the FTSE is seen opening 43 points lower, the CAC 26 points lower and the DAX 80 points lower.

The markets took some time to react to Friday's report, with stocks initially seen responding positively despite the number being far from impressive. While the number of jobs added in March was roughly in line with forecasts, the market had other ideas ahead of the release, with many suggesting that the lost hiring in the three months previous, due to poor weather, should feed through into the March reading. For whatever reason, that could not be seen in Friday's number and with corporate earnings season getting underway this week, traders were in no mood to hang around and bank on strong first quarter earnings, not with the amount of profit warnings we've already had.

The next few weeks are shaping up to be fairly gloomy, with earnings season reminding investors that not only is the Fed taking a step back from its ultra-supportive stance, but corporate America is not yet ready to fill the void. In past earnings seasons, companies have managed to paper over the cracks with growth to the bottom line being helped significantly by cost cutting rather than stronger revenues, which is what we need to see in the long run.

Investors have allowed companies to get away with that to this point simply because the Fed's quantitative easing program made it worthwhile, but with them now injecting less and less into the markets, investors may not be so willing to accept what is essentially fake growth. Cost cutting may be a necessary part of business and it may be a good way to drive growth in the short term, but there's only so much any company can cut back before it needs to turn to higher revenues to drive earnings growth.

The other tactic used by many companies in recent earnings seasons has been lowering the bar before the release of its results in the hope that when the numbers come out, investors are actually quite relieved and don't punish the stock too much. Again, this has worked for a number of quarters now but I just don't think investors are going to be as tolerant this year. If corporate America doesn't start to deliver, I don't see investors giving it an easy ride any more.

Another reason why this earnings season is so important is because the numbers coming from the economic data have been far from impressive. The improvement in March, the first month that it has not been possible to blame the weather, has been marginal, especially when compared to what we expected.

The coming months could pick up but for now, all we can do is follow the earnings season and hope it gives us something to be more positive about. The economic calendar isn't offering much to go on this week, especially compared the one just gone, with today looking particularly quiet. In fact, the sentix investor confidence reading for the eurozone is the only noteworthy release today. The improvement in investor sentiment towards the eurozone has been incredible in the last 12 months and April is expected to be no different, with the number rising to 14.2, the highest reading since April 2011.

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