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We Have Nothing to Fear but Earnings Season Itself

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Earnings season is upon us: how bad will it be? Maybe not as bad as everyone thinks.

This morning, ISI left its 2013 and 2014 earnings estimates unchanged, adding that "the risk is to the upside."

I would agree. We are hearing the usual chorus of complaints at the start of earnings season, that profits look anemic (low single digit growth) while toplines are essentially flat.

While I believe this will be a lackluster quarter, it is a long way from a disaster. Let's look at the estimates: both Thomson Reuters and S&P Capital IQ have S&P 500 earnings estimates up 2.9 percent this quarter. For the past few years, the final number has been roughly 3 percentage points above the number going into the quarter. If this quarter follows historic precedents, earnings growth will be 2.9 percent plus 3 = 5.9 percent.

The historic average, for the past 15 years, is about 8 percent growth, according to S&P Capital IQ. While 5.9 percent is certainly subpar, it's hardly a disaster.

And what about the essentially zero topline growth? That may change too, if we start getting even slightly better economic growth.

That's because acceleration of growth helps boost the topline. Are there signs of that happening?

Nick Raich at Earnings Scout thinks there is: he notes that companies that have reported most recently—those with a May quarter end that posted results last month (NIKE, Autozone, Bed Bath and Beyond, Oracle , Micron, Federal Express) showed some re-acceleration of growth from the first quarter.

It follows that better economic growth could also argue for a multiple expansion.

Remember the key point about the economic "recovery": it's just like the stock market rally of the past couple years. No one believes in it. No one believes the economy can stand on its own without the Federal Reserve's help. If it does, the stock market will be the beneficiary.

Elsewhere:

1) Global markets rally after aluminum producer Alcoa kicked off earnings season with a beat. Commodity stocks BHP, ArcelorMittal, Rio Tinto, Cliffs Natural Resources, and AngloGold Ashanti are up two to three percent premarket. Copper futures, however, are down after weak China inflation data reinforced concerns about slowing growth in the world's biggest copper consumer. Consumer prices in China rose at a faster-than-expected pace of 2.7 percent in June, but producer prices fell for a 16th consecutive month.

2) Speaking of China: a key event to watch in the next few days is the People's Bank of China (PBOC) credit data. This will be a look at what loan levels have been: if they are curbing loan growth, you will see downward revisions to Chinese GDP growth. The PBOC should release figures by July 15. Second quarter GDP is also due on July 15; estimates call for 7.5 percent growth.

3) Kroger (KR) opens at an historic high, after America's biggest supermarket operator said it will acquire Harris Teeter Supermarkets for $2.5 billion. The deal will expand KR's presence in the southeast and mid-Atlantic regions. KR offered $49.38 per share in cash, a 1.8 percent premium to Harris Teeter's closing price yesterday -- sending its stock up more than one percent. Harris Teeter's shares have rallied more than 30 percent since January 18, when reports first surfaced that the company was up for sale.

4) Goldman Sachs downgrades IBM, noting that "we believe pressure on IBM's growth markets and higher-margin revenue streams may intensify in the near term..." The bottom line here is weaker IT spending trends affect Big Blue too.

5) Danaher popped to an historic high after the opening bell, up more than two percent in early trading, after the industrial conglomerate raised it Q2 earnings and revenue guidance ahead of its annual shareholder meeting. The company expects second quarter profit and revenue to be slightly above the high end of its previous forecasts of $0.80 to $0.85 per share, and one to two percent, respectively. The company releases second quarter earnings Thursday, July 18.

By CNBC's Bob Pisani

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  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

Wall Street