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Do Low Earnings Expectations Equate to a Big Opportunity? (Update 1)

NEW YORK ( TheStreet) -- Here's another sign that bullishness is back in fashion, expectations for the fourth-quarter earnings have come down significantly in the past few months and that's being spun as a positive for the broad market.

"The good news is expectations are low despite the economy showing some signs of improvement," writes Gary Thayer, chief macro strategist at Wells Fargo Advisors. "We believe investors are more likely to see better than expected results rather than weaker than expected results."

The truth is, though, investors typically always see better than expected results with roughly 70% of companies beating the Wall Street earnings view in most quarters. Of course, a lower hurdle creates a scenario of increased headline comfort but it's debatable whether that should be enough to support a rally for the broad market off current levels. After all, there had to be reasons worthy enough for expectations to come down in the first place, right?

Well yeah, there has been in fact. Putting aside the big-picture fears of about the havoc a boiling over of Europe's sovereign debt crisis would wreak, there has been a rash of corporate warnings for Wall Street to parse. Through Friday, 130 S&P 500 companies had pre-announced their fourth-quarter results. Of that number, 99, just shy 20% of the companies in the 500, offered up negative pre-announcements vs. 30 positive ones, according to Thomson Reuters, which offered this bit of perspective.

"By dividing 99 by 30, one arrives at an N/P (negative to positive) ratio of 3.3 for the S&P 500 Index," the firm said. "This 3.3 ratio is the largest showing since the 3.5 ratio in Q4 2008, in the midst of the last recession, and above the long-term aggregate (since 1995) N/P ratio for the S&P 500 (2.3)."

Some of the more high-profile warnings have included Intel (INTC - Get Report), Texas Instruments (TXN - Get Report) and DuPont (DD - Get Report). Many smaller-cap companies have sounded the alarm too, most recently Acme Packet (APKT) last week.

Ahead of Alcoa's (AA - Get Report) report after Monday's closing bell, Wall Street is now expecting year-over-year earnings growth of 7.8% for the S&P 500, down from an outlook of 15% in early October, according to Thomson.

Alcoa posted an in-line loss so not much to go by there, but the Dow component's results are tied to aluminum prices so the red ink the company spilled in the fourth quarter was no surprise, which partly explains the stock's 40%-plus drop in 2011, second worst among the blue chips.

Meantime, both Juniper Networks (JNPR - Get Report) and Liz Claiborne (LIZ) back off their previous financial projections, so the warnings keep coming. Juniper's stock had a rather muted reaction to the news, suggesting Wall Street's low expectations may provide some insulation even companies fall short of goals.
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AA $10.24 -0.78%
DD $64.26 -0.88%
INTC $29.85 -0.83%
JNPR $22.52 -0.84%
TXN $56.43 -1.35%


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