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Market Jitters as Stocks Face Fall Over Earnings, Fed Policy

NEW YORK (The Street) --- Strategists warn that a "murky" earnings season and tighter monetary policy could trigger a pullback in stocks, following 26% gains in 2013.

While many pundits are bullish on earnings growth, Well Fargo senior analyst Gina Martin Adams notes that excluding financials, index earnings were expected to grow just 4.6% this year. "Revenue is expected to rise just 0.6% year on year, suggesting Q4 earnings will likely continue to rely on margins and share buybacks, sparking concern about the quality of constituent earnings results," she told clients in a note.

"With expectations for an earnings recovery in 2014 relatively broad, high misses this season could create a bit of market turmoil."

Barclays Capital chief market strategist Barry Knapp said monetary policy would likely trigger a period of flat-lining in equity markets. He suggested stronger data and inflation would see rate hikes sooner than expected, causing a sharemarket pullback in the first half.

"We expect earnings season to be a modest short-term upside catalyst for stocks," he told clients in a note. "However following earnings season, we expect a period in which markets digest rapid expansion in valuation multiples [and] tighter financial conditions."

Societe Generale's head of global research Patrick Legland noted that earnings per share had reached a historical high due to cost cuts and share buybacks. He said the macro environment was positive for US stocks, but that corporate profitability would be scrutinized after a strong rise in valuation multiples.

Adams said investors seeking optimism in the earnings outlook faced a season full of negativity. "However, improving earnings growth in tech and industrials, steady growth in health care, and a turnaround for energy and materials are expected to provide some hope for sales growth in 2014," she added.

The Wells Fargo analyst said financials would be the likely driver for growth for fourth quarter earnings. A slew of major banks are set to report this week, including JPMorgan Chase (JPM), Bank of America (BAC), Goldman Sachs (GS), Citigroup (C) and Morgan Stanley (MS)

-- By Jane Searle in New York 

Follow me @itsjanesearle 

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