Dollars and Sense: Crisis averted, on to earnings season

Crisis averted. “Our long national nightmare for the markets is over.” Those were the famous words Gerald Ford used at the end of the Watergate scandal, so to use them here is a bit ironic. But, yes, the debt ceiling crisis is over, and the federal government is back to its normal dysfunctional self. For now.

Back to normal? News from the Federal Reserve will likely be almost non-existent next week, and we’re now in earnings season again, so I think for the next couple of weeks corporate earnings will play more of a role in the movements of the markets. Thompson Reuters estimated earnings would increase 4.5 percent from a year ago. But that estimate is actually a reduction of earlier estimates. So far, slightly more than half of reporting companies have beat earnings expectations, but it’s not unusual for a company to meet or exceed expectations. In fact, that’s what most companies plan to do, and in about 63 percent of cases they do. So, all in all, earnings season has gotten off to a mediocre start.

Earnings season? Speaking of earnings season, I had an email from a listener to our radio program, The World and Everything in It who asked, “What, exactly, is earnings season, anyway?” It’s a good question. The Securities and Exchange Commission (SEC) requires publicly traded companies to make quarterly disclosures to the public about their financial performance. That’s how we know how these companies are doing, so we can decide if we want to invest in them or not. It takes companies a few days to close their books and compile these documents, so about 10 days after the end of every quarter companies start releasing earnings reports. Traditionally, Alcoa is the first company to provide numbers. In general the SEC requires large, publicly traded companies to report within 40 days from the end of the quarter. That’s technically about six weeks, but in reality the release of these quarterly earnings statements come in a bell-curve distribution. Most companies want to report earnings as quickly as they can, while also doing so in a more or less orderly manner. That’s why from about Oct. 10 until about the end of the month, we’re in earnings season. And the cycle repeats every three months.

Earnings so far. Citigroup fell short of expectations, but Coca-Cola and Johnson & Johnson both out-performed estimates. Microsoft significantly outperformed expectations, and Jefferies raised its rating on the tech giant from “hold” to “buy.” Microsoft seems to be a bellwether for what’s going on in technology generally. The tech-heavy NASDAQ is up more than 22 percent so far this year.

Mediocrity redux. So will that mediocrity extend into the week ahead? It’s hard to say. We will have more than 500 significantly sized companies make earnings announcements this week, including a number of Dow and S&P component companies. McDonald’s, Halliburton, and Boise Cascade, are a few companies you’re likely to recognize. What I can say is this: If the mediocrity in earnings reports continues, we’ll notice it. With the budget crisis behind us, we will start getting government reports again, and because we’ve been without the reports for a couple of weeks, it’s possible we’ll see a few surprises. But I’m guessing earnings will be the big financial news for the markets next week.

Listen to Warren Cole Smith talk about this week's financial matters on The World and Everything in It: