Earnings season: Here's what no one is talking about

Alcoa kicked off earnings season with a bang, getting a boost from weaker currencies. So, is this a prelude of what is to come?

Traders work the floor of the New York Stock Exchange.
Adam Jeffery | CNBC
Traders work the floor of the New York Stock Exchange.

The benefit to the big multinationals of falling currencies around the world is something that not one analyst has been talking about. All we have been hearing about is the negative effect of the stronger dollar. For some that might be an issue but as Alcoa demonstrated, companies that have operations in other parts of the world will benefit from those "favorable weaker currencies" on top of lower energy costs and any productivity improvements.

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That does not though negate the negative effect of a stronger dollar on their U.S. operations for products manufactured here and sold abroad, but what of the products manufactured abroad and sold abroad? That's a different story and, in some cases, one cancels out the other and the result is a more positive outlook.

That being said, earnings are expected to be down by some 4 percent year over year — that is an 8-percent reduction from previous estimates and this is setting the stage for investors to be disappointed. Plus, we have no reason to believe that the dollar will do anything but continue to move higher, which only continues to cause some concern as we move into the second quarter.

The market is prepared for all of this. So, unless some company has so misguided the Street analysts or is so out of touch with their businesses, we can most likely expect about 75 percent of companies to meet or beat their lowered estimates.

Investors will be listening for the guidance — any hint that the sun is still shining as companies try to insulate themselves by being more cautious on the outlook due to a rising dollar and a mixed global economy.

Overall, the market is expecting earnings growth in health care (10 percent), financials (8 percent), consumer discretionary (6 percent) and industrials (5 percent). Declines are expected from energy (down 60 percent), materials (down 5 percent), telecom (down 4 percent), consumer staples (down 2 percent) and IT (down 1.5 percent).

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So as long as the macro data remains cloudy and fears mount over any rate hike, companies need to be honest about what the outlook is, and what continued strength in the dollar vs. continued weakness in a range of other currencies means to the bottom line.

Companies that book a high percentage of international sales will likely guide lower if they believe the dollar will continue to move up. Conversely, companies like Alcoa that have overseas operations that benefit from a weaker currency, may guide higher. Either way, continued accommodative monetary policies around the world will surely outweigh most negatives and I don't see the market correcting by any significant percentage. Expect a test of the highs if earnings reports and future guidance aren't as negative as they have prepared us for.

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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.