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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."

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