Will Earnings Season Send Stocks Soaring?

Hope has been the primary fuel for those who have been bullish on the market through its darkest days. And keeping hope alive has certainly paid off over the past seven months.

Since its March 9 bottom, the S&P 500 index has soared 56%, bringing us to a 32% loss on that index since this time two years ago. The excitement has been driven by a number of factors.

For one, many investors believed that concern over the financial crisis turned into outright panic and stocks simply fell too low. Many have also pointed to the cost-cutting moves that many companies have made and are looking for that to feed the bottom line. And there's also been hope stirring recently that the economy is starting to turn back around and renewed growth will give earnings a helping hand.

So what about those earnings?
After Alcoa's earnings announcement today officially kicks off third-quarter earnings season, we're going to very quickly be inundated by earnings reports. The first few weeks of earnings season will be the most important, as investors will be looking to rapidly form conclusions about both third-quarter performance and the outlook for the final three months of the year.

Here's a look at a few of the major earnings announcements over the next couple of weeks and what Wall Street is expecting.

Source: Yahoo! Finance.

Obviously, there's not a whole lot here to get excited about. Though financial companies are expected to thoroughly outdo miserable results from last year, other major companies are still looking at major declines from 2008.

Of course, investors tend to be a forward-looking bunch, so third-quarter earnings -- along with year-over-year performance -- will likely take a backseat to more current disclosures and fourth-quarter earnings guidance.

Should Fools rush in?
A major issue to consider when it comes to fourth-quarter guidance is that it would have to absolutely blow expectations out of the water to bring market valuations down to truly appetizing levels. If fourth-quarter earnings for the S&P 500 companies are in line with Standard & Poor's current estimates, the index's trailing price-to-earnings ratio would still be at nearly 27 at the end of the year. In fact, based on those same numbers, that P/E wouldn't fall below 20 until June 2011 -- if the market didn't budge from its current level.

Data kept by Yale economist Robert Shiller tells a similar tale. He watches P/E levels based on average earnings over 10 years, and the market's current valuation of nearly 19 is notably above the measure's long-term average of 16.

At the same time, though, investors are currently stuck for choices when it comes to chasing worthwhile returns. According to Bankrate.com, money markets are currently yielding 1.09%, while five-year CDs are delivering a measly 2.8%. There's little more to be had from U.S. Treasuries -- one-year Treasuries are yielding a teensy 0.4% and 10-year Treasuries are giving investors 3.3%.

What does this all mean? The absence of good alternatives to stocks right now could lead investors to keep right on buying even if valuations are high and expected returns are below what you can normally get out of the market.

Picking and choosing
Almost no matter what the fourth quarter brings, the simple fact is that the market's run-up has made it a more challenging environment for investors. Looking back, just about any stock was a good bet earlier this year. Heck, even broad-reaching index funds or exchange-traded funds could have made you a nice chunk of change. But higher valuations have taken away that fish-in-a-barrel situation.

But there are still opportunities to be had. Now is a great time for savvy investors to narrow their sights to individual companies to find investments that are still poised to deliver healthy returns. Earlier this week, the crew at Motley Fool Hidden Gems offered some thoughts on small-cap stocks that are still too cheap. And just yesterday, I took a look at how Warren Buffett goes about finding companies that will perform well over the long term.

So will the market soar on third-quarter earnings? I think it's pretty doubtful. But I also think investors willing to do a little work can find stocks that will deliver in spades.

The market's downturn throttled a great number of stocks, but was there a stock more unfairly punished than the rest? Check out my pick for the most unfairly punished stock.