Earnings Season Preview

While 2013 is over, a lot of data for the past year is still flowing in. Last Friday, investors were fairly surprised by a jobs report that showed the unemployment rate drop handily from 7% to 6.7%. Yet monthly job gains were only 74,000, the weakest of 2013. On the surface, this makes little sense. Digging deeper, we find that the big drop in the unemployment rate was mostly due to people dropping out of the labor force. As a reminder, if you are not in the labor force-students, retirees, etc.-you are not considered unemployed. According to the Bureau of Labor Statistics (BLS), a lot of people dropped out in December.

On the corporate front, 4th quarter earnings season kicked off last week, and analysts and strategists will be watching closely as they set their expectations for 2014. As of Friday, only about 5% of S&P 500 constituent companies have reported results. About 54% of reporting companies have beaten analyst estimates, while about 37% have missed.

According to Standard & Poor’s, analysts expect earnings to be near $120 by the end of the year, which puts the forward-looking P/E close to approximately the historical average of 15. If the $120 estimate pans out, that would mean that earnings in 2014 would have to have grown between 13-17%. That’s pretty good, and if it happens, investors may be in for another pretty decent year in the stock market.

If corporate spending picks up, something that has been pretty muted over the duration of this bull market, that could have a positive impact on earnings as well. To be sure, companies have had a lot of policy uncertainty since the financial crisis and the Great Recession, and that has had a negative impact on business investment. If the legislative and policy outlook can continue to become clearer in 2014, we could see more capital investment to add to the earnings growth that has already come from the consumer.

Clearly, a lot can happen between now and year-end, but a lot of uncertainty seemed to dissipate in 2013. That, as much as anything, was the surprise of the year. Investors had become almost resigned to the fact that legislative bickering in D.C. or Europe would cause occasional market shocks. That wasn’t the case, though, in 2013.

Uncertainty may increase in the summer with mid-term Congressional elections in the fall-and the normal rhetoric that comes with them. That said, if we can avoid outright gridlock and what in the past seemed like constant threats to shut down the government, companies should be able to plan, invest and grow.