Earnings season is upon us, and many analysts are predicting that it won't be pretty. According to data analysis company FactSet Research Systems, earnings at S&P 500 companies are expected to contract by 0.6% (link opens PDF), marking the second year-over-year decline in three quarters.
Aluminum-maker Alcoa (NYSE: AA) kicks things off after the bell today. Figures available on Yahoo! Finance show that analysts expect Alcoa to report between $0.04 and $0.13 per share in earnings, with a consensus estimate of $0.08 per share.
But while the purported economic bellwether is the first company on the Dow Jones Industrial Average (INDEX: ^DJI) to report, does its performance set the tone for the rest of earnings season? FactSet's John Butters suggests that it just may be: "Recent history shows that when Alcoa has beat estimates, the price of the index has increased about 80% of the time over the next three months." Yet, as Butters goes on to explain, "When Alcoa has missed estimates, the price of the index has actually increased nearly as often as it has decreased over the next three months."
In other words, perhaps there isn't such a strong causal relationship after all.
The bigger issue is how the banks performed over the first three months of the year. "Most of the people I'm talking to have low expectations for earnings," an executive told The Wall Street Journal. "There's a lot of trepidation over what the banks will report."
The nation's first- and fourth-largest banks by assets, JPMorgan Chase and Wells Fargo, get the ball rolling this Friday. As I discussed, analysts will be watching three things in particular: mortgage originations, expenses, and trading profits or losses in the wake of the Cyprus bailout.
To be fair, if the performance of the market today is any indication, investors don't seem to be overly concerned, as the Dow is up a negligible four points with an hour left in trading.
Today's sluggish market could, however, have more to do with an impending speech by Federal Reserve Chairman Ben Bernanke scheduled for later today. Bernanke is expected to reaffirm the central bank's support for its current monetary policy, under which it's buying $85 billion in Treasuries and agency mortgage-backed securities per month in order to boost housing demand and compress long-term interest rates.
So will stocks get crushed this earnings season? It remains to be seen. On the one hand, earnings could well be lackluster, led in particular by the banks. But on the other, the Fed is doing everything it can to pick up the slack.
John Maxfield has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of JPMorgan Chase & Co. and Wells Fargo. 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.