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Financials Report as Stocks Stall on Key Pivot Point

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There's a lot at stake this earnings season, and the financial sector, the biggest stock market winner of the past year, will be put to the test Wednesday.

Both Goldman Sachs and J.P. Morgan, viewed as the best of breed, report ahead of the opening bell. But the bar is low this quarter for J.P. Morgan, expected to report a decline from third quarter profits to $1.16 per share on revenues of $24.42 billion.

Capital markets revenues are expected to be lower than the third quarter, but not as weak as the year ago quarter or earlier guidance. The bank is also expected to release details of a lengthy internal report on the London "whale trade" debacle that resulted in a more than $6 billion loss last year.

Earlier this week, J.P. Morgan received the first sanctions in response to the botched trades and was hit by four enforcement actions from the Federal Reserve and Comptroller of the Currency, aimed at lapses in risk management and money laundering controls.

Goldman Sachs, meanwhile, is expected to report earnings of $3.78 per share on revenues of $7.91 billion, according to Thomson Reuters. Other financial companies reporting include US Bancorp, Bank of NY Mellon, Northern Trust,Charles Schwab and M&T Bank also report before the market open. Citigroupand Bank of America report Thursday. Besides the financials, eBay reports after the closing bell Wednesday.

The financial sector is up 30 percent since January of last year. J.P. Morgan and Goldman, as two major pillars of the sector will be most scrutinized. "I think people are going to look long and hard at these businesses and what interest income looks like," said Steve Massocca of Wedbush Securities of J.P. Morgan. "They're going to want to get into the weeds and see how these businesses are doing."

(Read More: Bank Earnings: What to Watch)

Massocca and others say the market is at an important pivot point. He said poor earnings could drive the market into correction, but it's too early in the reporting season to tell which way things are going.

The S&P 500 closed 1 point higher at 1472, and the Dow was up 27 at 13,534 Tuesday.

"We've been hanging around the September high for four days in a row so something is going to break one way or the other," he said. "I think if we break through it, we could run back to the old 2007 high. Conversely, if we fall through it, we'll go to (S&P) 1400. We're at an important juncture."

"Estimates have really been whittled down. If you look at where estimates were in October and November, the estimates were much lower than they are today. I would have said a month ago, it's going to be a disappointing earnings season, but I don't know because they've been revised down so much," Massocca said.

(Read More: Four Stocks Rising on Big Market Volume)

As the Dow edged up slightly Tuesday, the Dow Transports rose 0.7 percent to a new high. "It's significant. It's going to get all the Dow theorists back out again, but I think you want to wait and see if you get follow through with the industrials," said Art Cashin, director of floor trading at UBS.

As the theory goes, the industrials must confirm the move in the transports for the market to move higher. Massocca said the move in the broader indexes, like the S&P 500, are more important.

"In the next two weeks, earnings are going to be the really big news. Once that's passed, all eyes will be focused on that great sequel – fiscal cliff two," he said, of the pending debt ceiling and spending debate.

What Else to Watch

There are several economic reports Wednesday, including CPI at 8:30 a.m. ET, Treasury international capital flows at 9 a.m., and industrial production at 9:15 a.m. The National Association of Home Builders releases its sentiment survey at 10 a.m., and the Fed Beige book on the economy is released at 2 p.m.

Minneapolis Fed President Narayana Kocherlakota speaks at 10 a.m. and 8 p.m. at two different events. Dallas Fed President Richard Fisher speaks at 7 p.m. at the National Press Club on why it's important to downsize institutions that are too big to fail.

In Washington, President Barack Obama is expected to announce new controls on firearms at 11:45 a.m.

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