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.

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