Earnings Season May Decide Market's Next Direction
Stocks have been moving sideways since the Federal Reserve announced QE3 in mid-September, and investors are now awaiting the next big market catalyst: third-quarter earnings.
“The market’s swinging around and there’s no conviction—people are nervous about a lot of things,” said Yu-Dee Chang, chief trader at ACE Investment Strategists. “For the time being, I expect more weakness.” (Read More: 'Zombie Economy' May Give Markets a Scare in October)
Despite concerns that the market may have hit a temporary high, some investors continue to hope that positive earnings surprises will outweigh negative ones when earnings season kicks off next Tuesday with Dow component Alcoa.
“The market runup was purely on expectations for QE3—and once the statement was issued, there’s been no new positive catalyst coming in,” said Natalie Trunow, CIO of Calvert Investments. “The only reason it’s stayed up is because the market is expecting the earnings season to come out better than expected…That’s hard to anticipate, but I don’t think we’re going to see a great deal of positive surprises.”
The S&P logged a healthy six-percent gainin the third quarter, mainly due to anticipation of more stimulus from central banks around the world. But stocks have been treading watersince the Fed announcement, with the Dow and S&P 500 down less than 1 percent each.
Despite the gloomy outlook, most investors are holding off moving to the sidelines.
"[Investors] don’t want to miss the rally if the earnings season is positive," said Trunow. "Stocks might stay up or go higher if we see an overall positive surprise, but I see more risk on the downside at this point over the next quarter or two. But once we're done with the election and get clarity on the 'fiscal cliff,' I think we can go up from there."
Earnings expectations for the third quarter have been contracting. Currently, S&P Capital IQ analysts expect earnings for the S&P 500 to fall 1.7 percent, which would be the lowest expected growth rate since the third quarter of 2009. Meanwhile, Citigroup has a negative 2.4 percent estimate. (Read More:Is Q3 the Bottom for Slowing Earnings?)
"Half of the sectors are expecting negative growth from a year ago and 9 out of 10 sectors have experienced a decline in estimates for this upcoming reporting quarter," according to Citigroup's latest research note.
In recent weeks, several major companies including Caterpillar , FedEx and Noforlk Southern have issued warnings, underscoring worries over the slowing global economy. Strategas Research Partners noted that for every five earnings corporate pre-announcements for the third quarter, roughly four have been negative, marking the highest ratio in nearly 11 years.
—By CNBC’s JeeYeon Park (Follow JeeYeon on Twitter: @JeeYeonParkCNBC)
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