Outlook for 1Q earnings seen weak

Higher payroll taxes, sequestration may hit consumer companies in particular

Apr 8, 2013 @ 4:13 pm

By Jeff Benjamin

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As Alcoa Inc. (AA) officially kicks off the start of earnings season today, with the company beating net income estimates by 3 cents a share, analysts and market watchers are keeping expectations measured.

Even as companies and analysts have been bringing estimates down to avoid the negative market reaction of not beating expectations, the outlook for the quarterly numbers is generally low.

“I'm expecting some big impacts from the payroll tax increase, particularly from consumer-based stocks,” said Brian Frank, portfolio manager at Frank Capital Partners.

“You might see some pretty big disappointment son the higher valued stocks, because we're starting to see a macro down tick,” he said. “It makes sense that some of the highfliers will see a pull back.”

An uptick in expectations for the pace of economic growth in the United States goes against the grain of the trend toward reduced earnings expectations, said Hugh Anderson, managing director at HighTower Advisors LLC.

“Domestically, it seems to be more optimism that first quarter [gross domestic product] will be above expectations, but corporate earnings are still challenged by the uptick in payroll taxes and the impact of sequestration,” he said. “Right now it looks like, year over year, the first quarter earnings will be flat.”

The recent performance of defensive sectors such as health care and consumer staples is one indicator that things might not be as rosy as the recent stock market performance is suggesting, Mr. Anderson said.

“Europe has become a challenge again, Asia is clearly a mixed bag, and the outlook from corporate management has been tepid,” Mr. Anderson said.

“Since the 2008 meltdown blue chip stocks have been deriving so much of their earnings and revenue from overseas that they have become very sensitive to Europe and Asia,” he said.

As analysts scramble to camouflage the earnings by bringing down estimates, the number of company beating first-quarter earnings estimates will probably not be an issue.

“Coming off a period of record earnings, it can be a bit of a letdown. That's why the key is probably to look at consumer stocks,” said Brian Gendreau, a market strategist at Cetera Financial Group and professor of finance at the University of Florida.

“We've still got 7.6% unemployment, people are dropping out of the workforce, and the government's debt load hasn't been dealt with,” he said. “When the Fed is still buying $85 billion worth of bonds a month, the good news is the fire truck is here, and the bad new is your house is on fire.”

Joseph Tanious, global market strategist at J.P. Morgan Funds, has a lot more faith in the consumer's ability to spend.

“I expect consumer discretionary stocks to do well,” he said. “The earnings across the board will probably land somewhere similar to the fourth quarter of last year with approximately 5% earnings growth.”

Mr. Tanious pointed out that, in terms of earnings growth, the S&P 500 reached a record high a year ago, making it a tough mark to beat on a comparable basis.

“I think the consumer was out there this quarter and spending in full force,” he said. “We'll have to wait until next quarter to see if there's going to be a slowdown in consumer spending.”

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