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Sluggish Earnings Will Have Limited Impact on Stocks

Ideally, when we invest in a company, we want to see profit growth. Without improvements on the revenue side, it will be very difficult for companies to see growth in the bottom line. But at the same time, the S&P 500 is still trading within reach of its all-time highs. This is largely because (from a comparative standpoint) there is not much to be excited about in other asset classes or in stocks from other countries.

In fixed-income, for example, a rising interest rate environment would reduce returns as bond prices fall. Weak manufacturing data in China, recessionary conditions in Europe and collapsing stock markets in Japan and emerging markets remove these areas as viable alternatives for near-term investment. So, while growth projections in the U.S. remain sluggish, this does not necessarily mean that a poor earnings season will lead to major bear declines.

But which areas should we be watching? There are only a handful of sectors that are likely to post actual earnings growth in the coming weeks. Potential strength could be seen in financials. Early earnings releases will be seen from JPMorgan Chase (JPM) and Wells Fargo (WFC), and the outcome from these reports will be used as an indication of what to expect through to the later parts of the season.

As a whole, financials are projected to see earnings growth just under 20%, which is much better than what is expected for the broader market. The financial sector is an area that will benefit from increases in interest rates, as this type of environment supports its traditional business models.

Overall, however, there are reasons to believe that a mediocre earnings seasons will not create large bouts of profit taking and send the benchmarks back toward new lows. Given the lack of investment alternatives, the bearish impact of slow growth should be limited.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Richard Cox is a university teacher in international trade and finance, focusing primarily on macroeconomics and price behavior in equity markets. His articles appear on a variety of websites, including MarketBulls.net, Seeking Alpha, FX Street, and others. Investing strategies are based on technical and fundamental analysis of all the major asset classes (stock indices, currencies, and commodities). Trade ideas are generally based on time horizons of one to six months.
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