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What to look for in earnings

Earnings, earnings, earnings. This week, we will hear from some 150+ S&P 500 companies, so prepare yourself.

Expect to hear the same song. For the most part, earnings will beat the expectations. Analysts will sing about the ongoing recovery — now notching in at 5 years, companies will cite improvements in cost structure as most of the reasons for the better bottom line.

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

Investors will and should look for improving revenue, or top-line, growth — numbers to really tell the story of what the future looks like.

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Investors should question how much longer companies can "restructure" — code for layoffs and cost reductions. If the economy IS improving, then we should see companies committing to new hires and new investments in capital expenditures (capex) which should translate into a strengthening GDP in the coming quarter and quarters. Investors will also be listening for new opportunities for companies to grow their businesses.

The heat is on. After the market's recent selloff — a selloff that was muted at best in the broader market — investors will be a bit more critical, I think. We realize that as Federal Reserve Chair Janet Yellen pledges to keep interest rates near zero for the foreseeable future to continue to help the economy, this will continue to blur the lines between reality and La-La Land. Investor should be questioning what this REALLY says about the health of the U.S. recovery.

Remember, the Fed suggests that this recovery will go on for two more years — and it may if they continue to feed the beast — while the Congressional Budget Office forecasts an expansion through 2017.

Read MoreEarnings are beating estimates—but don't be fooled

So far, earnings have been mixed to mediocre at best. But saying that, I have to recognize that almost two-thirds of the companies that have reported have "beaten the estimate." Expect that to continue. No longer should investors expect a "rising tide to lift all boats" — it is becoming a much more stock-specific story. Misses will be punished individually as investors/traders look for indications that any news is company specific, thus not punishing whole sectors at a time.

Profits will have to move legitimately higher to sustain current valuations — otherwise look for the market to test lower once again. I do not believe that the weakness is over yet. I remain in the camp that investors will test again — no matter what the Fed does — because the reality of a slowly improving economy does not dictate some of the prices we are seeing. The recent rout in some of the growth names defines this as the momentum guys realize the complete disconnect between prices and fundamentals.

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Yes, the future does look better but so many things have to fall into place. Until investors are reassured that they are falling into place, the broader market will be held in check. The Nasdaq and Russell remain well below their 50-day-moving averages — a clear negative for investor psyche. Until those markets regain a sense of strength, the broader market will remain cautious. Yes, the Dow, S&P and transports are north of their 50-day-moving averages — suggesting that the "safety trade" in on — but the question remains: Are they out of sync with the economy as investors search for equity stability?

Commentary by Kenny Polcari, director of NYSE floor operations at O'Neil Securities. He is also a CNBC contributor, often appearing on "Power Lunch." Follow Kenny on Twitter @kennypolcari and visit him at kennypolcari.com.

Disclosure: The market commentary is the opinion of the author and is based on decades of industry and market experience; however no guarantee is made or implied with respect to these opinions. This commentary is not nor is it intended to be relied upon as authoritative or taken in substitution for the exercise of judgment. The comments noted herein should not be construed as an offer to sell or the solicitation of an offer to buy or sell any financial product, or an official statement or endorsement of O'Neil Securities or its affiliates.

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