3 Things to Watch as Earnings Season Begins

The Dow Jones Industrial Average is hovering around breakeven late in trading as Wall Street prepares for Alcoa's results to kick off earnings season.

Apr 8, 2014 at 3:30PM

Amid all the day-to-day noise on the stock market there's actually a time when companies' fundamental performance matter: earning season.

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Over about a month, four times a year, most companies report their earnings results from the recently finished quarter. For years, Alcoa (NYSE:AA) kicked off earnings season as the first Dow Jones Industrial Average (DJINDICES:^DJI) component to report. While the aluminum giant got the boot from the Dow last September it hasn't lost its place as the season's earnings bellwether. Alcoa is scheduled to release its latest numbers after market close today, and we'll be off to the races this earnings season.

What to watch for this earnings season
Since it offers the first peek into the earnings season, investors should look for a few broad indicators in Alcoa's report. The first is growth, which will be hard to come by in an economy growing at 2.6% per year. In fact, Wall Street expects Alcoa's revenue to be down 4.6% to $5.56 billion in the first quarter.  

Factors that will impact growth include a slowdown in China and weather in the U.S. Look for indications that revenue can grow over the long term, particularly if global growth picks up in the back half of the year.

Wall Street Bull

Will bulls or bears take hold of the market in 2014?

Speaking of the second half of 2014, many companies use earnings reports to give guidance, or lay out their expectations for the year. If guidance goes up then conditions are better than expected, while a reduced guidance (relative to previous reports) indicates things are getting worse. This season will offer the first updates to companies' 2014 guidance, so keep an eye on where numbers are headed on a broad basis.

Finally, watch for macro changes to the U.S. economy, particularly on the employment side. Obamacare is now in effect, and costs for employees may be rising due to the health insurance reform law. As the unemployment rate drops we will also see a rise in employment costs because skilled workers will be in higher demand.

Higher labor costs aren't necessarily bad, because that money eventually flows back through the economy in the form of consumer spending. Still, labor and income trends can offer insights into how the balance of power between business and labor is shifting and how margins may trend over the next few years.

Every company is a little different, but these three large trends are worth keeping an eye on throughout earnings season because they'll give you a clue as to how 2014 will shake out.

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Travis Hoium has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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