War Obscures Grim Earnings Season

Corporate earnings warnings are more negative than they've been in a year, but with all eyes on the war, the trend might go unnoticed -- until the war obsession fades, that is.

Although the so-called earnings confessional season hasn't yet run its course, first-quarter warnings are significantly worse than they have been in any of the last five quarters, according to Thomson Financial/First Call.

Analysts worry that if earnings don't show any meaningful improvement soon, recent gains in the market -- fueled by the onset of war -- won't be sustained. The Dow has climbed almost 12% from its March 11 intraday low, and the Nasdaq has jumped 11% from that time.

"Clearly, the market has rabbit ears on for news events out of the war, but when that is behind us, we'll go back to focusing on the same things," said Jeffrey Saut, chief investment strategist at Raymond James. "Most people still haven't caught on that this is not the typical business cycle. We don't have sufficient final demand to pull the economy forward, and the earnings aren't enough to energize the capital spending cycle."

Amid economic and war woes, the ratio of negative to positive preannouncements for S&P 500 companies has hit 2.9 -- meaning that there are almost three times as many negative first-quarter warnings as there are positive ones. This time last year, the ratio for first-quarter preannouncements stood at 1.7.

It's worth noting, however, that the current ratio isn't dramatically above its long-term average of 2.5. "People are saying, OK, we're getting far more negative news than last year, but in the grand scheme of things, it's not that much worse than it normally is," said Joe Cooper, a research analyst at First Call.

Still, worsening earnings warnings aren't a good trend. "Eventually, earnings revisions will matter," said John Waterman, managing director of investments at Rittenhouse Financial. "To have this rally continue, we need to see earnings accelerate, and we need some more upward revisions."