With the near record melt up in stocks last week already history, vacuum tubes are already eagerly awaiting the next week of wild and crazy momentum swings in which earnings season comes with a bang as 100 of the S&P 500 companies, or 33% of the total market cap, reports earnings. And even with lowered earnings expectations, hence the upcoming beats, the trailing 4 quarters of S&P 500 earnings which are now expected to come at $94, will represent a new all time high, over the $91.47 record set in Q2 2007, and well above the $90.91 LFQ posted last quarter. As Goldman notes, "To remain below the previous peak, earnings would have to miss current bottom-up consensus expectations by 10%, which would represent a significant shortfall." As for what Goldman, or specifically what its clients expect, here is the rundown: "Conversations this week focused on the 3Q earnings season as investors look to use this earnings season to benchmark company performance in light of the uncertain macro environment. Solid micro data from earnings results could represent a stabilizing force in a market where volatility had been extremely elevated. Better-than-expected or in-line results would indicate firms can continue to produce strong profit growth despite weaker economic data, matching the pattern in both 1Q and 2Q 2011. However, high correlation will act as a market headwind if earnings disappoint. Average 3-month stock correlation for S&P 500 stocks rose significantly in August to nearly 0.75 and remains near record-high levels." However, so far earnings have been more or less a dud, with the exception of Google: "This week AA reported earnings below consensus estimates on higher costs and slowing European demand. SWY beat EPS estimates despite margin pressure. JPM results were largely in line with expectations after excluding one-time items." Well, no, absent the "benefit" of JPM effectively buying CDS on itself, it would have missed consensus by 20%. Expect the same gimmick to be used by all other financials.
Lastly, as to what one should expect from management teams: 'We expect management commentary on the quarterly conference calls will echo the uncertainty theme that featured prominently last quarter. Managements remain concerned about the prospects for the US and global economy, political policy, and consumer demand, and we expect limited company-level earnings guidance for 2012. Companies will continue to discuss input cost inflation and its impact on pricing and margins." And when needed, they will blame it all on market volatility: long gone are the days when a double digit move in the DJIA was a normal thing.
Some charts looking at the coming week:
And the past one: