Dollars and Sense: Wall Street braces for earnings season

Drowning out earnings? We’re now into earnings season, but with all the news coming out of Greece and China and elsewhere, it’s been hard to tell if Wall Street is paying any attention to earnings. But, trust me, it is. You can ignore the underlying fundamentals—revenue and earnings on the corporate level and economic growth and productivity on the macrocosmic level—for only so long. It’s just a bit too early to tell what the earnings trends are. Only about 15 percent of the S&P 500 companies have so far reported earnings. Earnings expectations are modest this quarter, but two major banks, JP Morgan and Wells Fargo, both beat earnings projections. Bank of America reported its biggest quarterly profit in nearly four years. Citigroup, eBay, and Netflix all posted strong quarterly results.

Greece still in trouble. And who can blame the world for noticing the deal in Greece, since the country has been on the brink for so long? Some would say Greece is still on the brink. The deal to end its credit crisis doesn’t solve huge structural problems with the country’s economy. Greece is one of the oldest countries in the developed world, so pension costs are high and rising. Unemployment is 25 percent, and 50 percent among some of the younger demographics. Tourism is a huge part of the economy. That can be a great industry, but it’s very vulnerable to economic cycles and creates mostly low-paying, service-sector jobs. High tech, manufacturing, and financial services are weak industries there, and likely to remain so for as long as the country has what is essentially a socialist government.

Around the globe. Let’s fly around the globe a bit more before we land back here at home. Another big general news story for the week was the deal with Iran. Setting aside the geopolitical implications and looking purely at the economics: This deal has the potential to turn Iran into an economic powerhouse in the Middle East. The country has nearly 80 million people—10 times the population of Israel. Its gross domestic product is $1.3 trillion, three times the size of Israel. Iran is three times the size of Greece, larger than Poland, and nearly the size of Spain. And one of the immediate effects of lifting the sanctions will be to un-freeze about $100 billion in Iranian assets held in overseas banks. The nuclear sanctions in this new deal had better work. An Islamic country of this size and wealth—with nuclear bombs—is a very scary prospect.

The week ahead. We’ll be in the fat part of earnings season, and by this time next week we should know how things are shaking out. So far, the news has mostly been good. More than 70 percent of companies reporting so far beat expectations. But expectations have been very low, so “beating expectations” is not much of a victory. The real number to care about is price-to-earnings ratio. That number has been 20 to 30 percent above historical averages for the last year or more. So, either stock prices have to fall or earnings have to increase pretty significantly.

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