The stock market can often lose its mind over the slightest earnings miss. Last week, strong earnings weren't even enough to push stocks higher. I hate to think about what would have happened if Alcoa (NYSE:AA) and the big banks would have missed their numbers.
But there are good earnings misses and bad earnings misses, something we should keep in mind when looking at the bigger picture.
Energy is set to disappoint
Stocks tied to the price of oil may be in for a rough quarter. Chevron (NYSE:CVX) already warned that earnings would be "substantially lower" because of the low price of oil and disruptions to production.
Monday, Bloomberg reported that earnings from oilfield service companies Halliburton (NYSE:HAL) and Schlumberger (NYSE:SLB) may be $1 billion lower than last year. The low price of natural gas has forced explorers to cut back on natural gas drilling and the effect is starting to be felt across the industry.
Oil and gas producers like Kodiak Oil & Gas (NYSE:KOG), SandRidge Energy (NYSE:SD), and Devon Energy (NYSE:DVN) have all had earnings per share estimates lowered in the last three months as well. If they disappoint then the market wouldn't be happy and it could continue to push stocks lower. Â
The question is what we should make of these weak earnings reports from energy stocks? Earnings are moving lower for energy companies because prices for their products are low and in the long run aren't low energy prices also good for the economy? More money in consumers' hands leads to more economic activity, which should be good news for the economy as a whole.
Earnings misses in energy may actually be good news for the economy as a whole, even if the market doesn't like them.
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The same could be said about medical stocks. Strong earnings for pharmaceutical, medical device, insurance, and hospital companies mean we're spending more on medicine and less on other goods. It's also likely that the government is spending more as well, which is bad for the federal budget.
But if these companies miss earnings estimates it might be a good thing for the economy as a whole.
However, unlike energy companies, earnings are expected to be stronger in the medical field. Eli Lilly (NYSE:LLY), Medtronic (NYSE:MDT), Pfizer (NYSE:PFE), and UnitedHealth Group (NYSE:UNH) have seen estimates fluctuate very little in recent months because demand isn't slowing down. If it were, we may have more money for the goods that will really goose the economy.
The stocks we should keep an eye on
So which companies should we be watching during earnings season? Consumer goods, housing, and banks are key. Consumers still account for a vast majority of the economic activity in the U.S., housing is coming back from a huge hole, and if banks are lending they add fuel to economic growth.
Wal-Mart's (NYSE:WMT) recent confidence in the U.S. has given me some hope that the American consumer can remain strong. The company is expanding its small-footprint stores in a hope to expand its retail empire. If Wal-Mart is feeling good about the U.S., then it's a good sign for consumers.
Homebuilders also seem to have turned the corner, which would be a great boost to the economy. Toll Brothers (NYSE:TOL), PulteGroup (NYSE:PHM), and Lennar (NYSE:LEN) all beat earnings estimates last quarter and estimates are on the rise. Another quarter of strong results from homebuilders would be another strong sign the recovery is in full bloom.
Last but not least are the banks. Citigroup (NYSE:C) reported a strong quarter yesterday following earnings beats by Wells Fargo (NYSE:WFC) and JPMorgan Chase (NYSE:JPM). The hope is that these strong reports will mean more confidence and more lending in the industry, giving the economy the fuel to grow.
It isn't that energy and medicine don't affect the economy, but they're not the same as the three areas I described above. If consumers are feeling confident they'll buy more goods or take out a loan for a new home. They're voluntary activities, unlike buying gas and going to the hospital, which are often necessities more than luxuries.
It's all about perspective
Over the next month there will be a lot of talk about earnings. It's important to keep in mind which reports matter to the economy more than others before we panic over a single report. What's bad for Chevron or Eli Lilly may be good for the rest of the economy. When we're focused on a recovery from a terrible recession the big picture matters.
Fool contributor Travis Hoium has no positions in the stocks mentioned above. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw. The Motley Fool owns shares of Citigroup, Devon Energy, Halliburton Company, JPMorgan Chase & Co., Medtronic, and Wells Fargo & Company. Motley Fool newsletter services recommend Chevron, Halliburton Company, UnitedHealth Group, and Wells Fargo & Company. 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.