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Why earnings will make or break the market this week

Earnings season is ramping up this week, and a lot is on the line. After a terrible few sessions for stocks, investors will look to corporate results to determine whether the economy actually lost steam in the first quarter of the year.

"There's no doubt in my mind that earnings are going to make or break the market this week," said Anthony Grisanti of GRZ Energy.

Companies as varied as Citigroup, Coca-Cola, Johnson & Johnson, IBM, Google, and Chipotle are set to report. And what increases the drama is that analysts are expecting Q1 earnings to drop 1.6 percent year-over-year. If earnings do actually shrink, then this past quarter will mark the first decline in S&P 500 earnings since Q3 2012.

Of course, that might not happen. Over the past three years, 71 percent of S&P 500 companies have beaten earnings estimates, and the average earnings growth rate has come in 3.1 percent above expectations, according to FactSet. If that trend holds this year, then actual earnings growth rate will be 1.8 percent, points out FactSet senior earnings analyst John Butters.

However, despite the low estimates, the start of earnings season has actually been relatively weak. Just 52 percent of the 29 S&P 500 companies that have reported have beaten estimates, according to Thomson Reuters I/B/E/S.

And just as weak economic data was pegged on the weather in the first quarter, companies have blamed harsh weather for weak earnings. Nearly half of the S&P 500 companies that have released results have mentioned a negative impact from weather, FactSet reports.

Prepare for a deluge of wintry earnings excuses

Traders on the floor of the New York Stock Exchange.
Getty Images
Traders on the floor of the New York Stock Exchange.

To some, that sets the market up for a scary binary.

Mentioning the modest earnings expectations, MKM Partners chief economist and market strategist Michael Darda wrote in a recent note that "Weather seems to be depressing Q1 earnings and, as a consequence, earnings expectations."

At this point, "we are likely to see earnings estimated 'breakout' from their recent slumber or the stock market 'breakdown,'" Darda wrote.

Read More 2014 crash will be worse than 1987's: Marc Faber

To that point, Rich Ilczyszyn of iiTrader warns that earnings could extend the recent declines in equities.

"A lot of big investors are pulling in cash, looking for other assets. And after these earnings, they'll deploy the equity again," Ilczyszyn said. "So be very careful this week to protect yourself."

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