NEW YORK (TheStreet) -- Corporate earnings have begun to show signs of strength this week, easing concerns about a slow start to 2014 even as the Federal Reserve's decision about its stimulus program continues to shape investor decisions.
The Fed's January policy committee meeting concludes on Wednesday, Jan. 29, with its statement expected at 2 p.m. EST. The market is forecasting the central bank will announce another $10 billion reduction in monthly bond buying to $65 billion.
With the Fed expected to continue to reduce its bond buying program, it's become important for investors to see proof that the market will be able to transition to an earnings growth-driven market from a liquidity-driven one, said Lon Erickson, a Santa Fe, New Mexico-based money manager at Thornburg Investment Management, which oversees about $90 billion.
That is, a market based on fundamentals, driven by revenue gains as opposed to cost-cutting and share buybacks.
"Investors are going to have to see something stronger than just cutting your way to success or the Fed putting money into the market," Erickson said in a phone interview. "And I don't think you can make a real, positive conclusion of that from what we've seen thus far."Despite Tuesday's good results, fourth quarter earnings have been middling so far, underscoring that slow pace of economic growth. As a result, markets are more susceptible to a pull back because they've been pricing for stronger fundamentals ever since the end of the 16-day partial government shutdown in October. For the 33 companies that have given first quarter guidance this earnings season, 21 are negative and 12 positive, leaving a negative to positive ratio of 1.75, which is lower than the 2.4, 15-year historical average, according Christine Short, the New York-based director for global markets intelligence at S&P Capital IQ.
This is certainly an improvement from the fourth quarter, where the negative-to-positive ratio was 8, but investors still want to see more, as they have set a higher bar for corporate earnings this year. Of the 144 companies that have reported earnings results, 98 have beat analysts' estimates, 33 have missed, and 13 have met, according to Short's report. "It's getting tougher and tougher to eke out those earnings,"Erickson commented. Many are now bracing for a roughly 10% pullback. Erickson said that a double-digit correction could present buying opportunities, but time is not on the side of the long investor. "If we don't get that good economic momentum that drives revenue growth in the early part of the year, we may start to see stocks get weaker from here," Erickson remarked. -- Written by Andrea Tse in New York. Follow @atwtse >Contact by Email.