For the stock market, it was a triumphant first quarter. But for earnings growth, the past three months were just ho-hum.
Analysts are expecting earnings for companies in the Standard & Poor’s 500 index to decline 0.1 percent compared with a year ago, according to FactSet. It’s a tiny number but a significant turning point. Earnings growth was on a winning streak for the previous nine quarters. Year-over-year earnings growth has been at least 10 percent for all but the most recent period, when it was 6 percent.
The reasons for the expected slowdown range from global (a weak Europe hurts everybody) to mathematical (it’s hard to top double-digit quarters). Whatever the cause, the stagnation in earnings growth is a stark reminder that the economy’s problems are far from solved.
We’ll soon see whether the expectations are on target. Earnings season gets underway Tuesday when aluminum producer Alcoa becomes the first major U.S. company to release its first-quarter results.
Should this batch of earnings contain a lot of bad surprises, it could upend a stock market rally that pushed the S&P 500 index up 12 percent in the first three months of the year.
Here’s what you need to know:
• Are earnings really that bad?
It depends on how you look at it. People are blaming the slowdown on several factors, including higher oil prices and Europe’s debt crisis. Those are legitimate concerns.
High prices for oil and gas make it more expensive for companies to ship their products and leave people with less money to spend on other things.
• Does the market care about earnings?
More often than not, a company’s stock moves in the same direction as its earnings.
Investors tend to trade on what they expect to happen in the coming months.
By the time a company actually announces its quarterly results, chances are they’ve already been baked into the stock price and won’t have much of an immediate effect unless there’s a big surprise.
A company’s predictions about the future are what investors really listen to.
