This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Market Preview: A Good Bad Sign

Updated from 6:05 p.m. ET to include additional commentary on earnings season from Wells Fargo and latest after-hours prices.

NEW YORK ( TheStreet) -- Undaunted by all the negative commentary floating around ahead of the third-quarter reporting season? You're not alone.

Birinyi Associates pointed out Tuesday that earnings pessimism is nothing new and argued investors have been well-served in the past by blocking out the noise.

"While earnings may be a 'bump in the road' for some companies, with correlation at the lowest level since April, there are still opportunities for stocks to outperform going into the end of the year and the overall negative view of upcoming earnings has not been a convincing reason to exit the market over the past two years," the firm said.

For example, Birinyi noted there was similar talk ahead of the second-quarter reporting season, and when the smoke cleared, 67% of S&P 500 companies beat expectations, a tad better than the 66% quarterly average seen since 2000. What's more, the S&P 500 rallied to end the calendar third quarter up nearly 6% though Ben Bernanke had a lot to do with that.

Birinyi also looked ahead to better expectations for future periods, saying "strategists are still calling for 10.2% earnings growth in 4Q12, 5.5% in FY12 and 10.7% in FY13."

All fair points though the year-over-year decline in earnings expected for the third quarter shouldn't just be brushed aside. After all, it's the first backpedaling in profits since the financial crisis and every day seems to bring fresh evidence that weak business conditions in Europe and the relative slowdown of growth in China are being felt stateside.

In addition, those bullish forecasts for the fourth quarter, fiscal 2012 and fiscal 2013 may be a lot less rosy after companies finish issuing guidance this time around. There's an argument to be made that the low expectations may be something of a good bad sign for stocks, making it easier for companies to outperform, but let's not forget that declining profits are still declining profits.

True believers in equities can take some comfort in the fact that this recent rally isn't the product of excitement about earnings; it comes courtesy your friendly neighborhood Federal Reserve and its promise of maximum accommodation. What's more, valuations for stocks are reasonable by historical standards so while an earnings-inspired rally may not be in offing, a severe pullback also seems like a reach, barring a turn for the worse in Europe or the United States falling off the fiscal cliff.

Scott Wren, senior equity strategist at Wells Fargo, is another market watcher that thinks the gloom and doom rhetoric about this earnings season is overdone.

"Another earnings reporting season is upon us and the media is out in force warning that the results will likely be disappointing; as if this is novel news the market needs to digest," he said in emailed commentary late Tuesday. "The fact of the matter is most equity strategists have been looking for third quarter earnings to be poor for some time. Despite reports to the contrary, market participants are generally not 'on edge' and 'fearful' about what companies will be saying over the next few weeks. The market, in our opinion, is prepared to a large extent for the overall bad earnings comparisons that are about to be reported."

1 of 4

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,156.85 +24.88 0.15%
S&P 500 2,001.57 +2.59 0.13%
NASDAQ 4,562.1890 +9.43 0.21%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs