Wall Street: Earnings on the loose

NEW YORK (CNNMoney.com) -- Uh oh. Here come the earnings.

Although a few marquee names opened the books last week - Alcoa (Charts) and GE (Charts) impressed, Genentech (Charts) not so much - the first big wave of quarterly earnings reports is due to land in the week ahead.

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Roughly 19 percent of the S&P 500, or 95 companies, are due to report results, including 12 Dow components. Standouts include Intel (Charts), IBM (Charts), Yahoo! (Charts), Google (Charts), Citigroup (Charts) and Pfizer (Charts). (see chart for details).

And while those individual companies may do just fine, the overall earnings reporting period is expected to be pretty bleak. S&P 500 growth in the first quarter is currently forecast at 3.3 percent, according to the latest Thomson Financial estimates. That's the worst its been in 3-1/2 years and far below the historic average.

Even when you factor in that reported earnings tend to beat estimates by around 3 percent, earnings are still on track to grow less than 10 percent, breaking a double-digit percentage streak that's gone back for 14 quarters.

However, the widely anticipated gloom and doom could actually be quite helpful for the stock market, analysts suggested.

"I really see the market in an opportune position," said Chris Johnson, chief investment officer at Johnson Research Group. "We've seen earnings expectations drop so much that it would be easy for companies to impress."

He said that investors won't even need to see blowout results, just results that are at least in line with forecasts or a little better. And the guidance for upcoming quarters needs to be good too.

"There's cash on the sidelines, there's the potential for the market to break out above the 2007 highs," Johnson said. "Unless the earnings blow it."

Other analysts are not as sure.

"I think over the next month, we'll see continued volatility as the earnings come on," said John Davidson, president at PartnerRe Asset Management. Davidson said that he expects investors to focus more on the individual earnings reports.

But it's not all about earnings. At least not in the beginning of the week.

The stock market saw its worst session of the week Wednesday after the minutes from the last Fed meeting showed the central bank was unlikely to cut interest rates anytime soon, and might actually have to hike before it can cut.

This was something of a blow to investors who were hoping that inflation might be moderating enough so that the central bank could lower borrowing costs this year.

"We've got important numbers next week that point to some of the risks the Fed is looking at," said Stephen Stanley, chief economist at RBS Greenwich Capital.

In particular, he cited the readings on retail sales, housing starts and consumer prices. (See chart for details.)

But most of those reports are due Monday and Tuesday, meaning the rest of the week will be all about the earnings.

The expected earnings weakness reflects tougher comparisons after several years of strong growth, particularly in sectors such as energy, which led the earnings charge through mid-2006 and remained a strong player through the end of last year.

However, the slower earnings growth is also a result of slower global economic growth. Weakness in the housing market and the fallout from the subprime mortgage lending crisis are also responsible.

At the start of the first quarter, growth was expected at more than 8 percent year over year. The reductions in the subsequent three months have been largely because of energy and the consumer discretionary sector, which includes autos.

However, all ten S&P 500 sectors that Thomson tracks have seen revisions drop since the start of the year, said John Butters, Thomson's senior research analyst.

In addition, corporations have gotten a lot more cautious about their forecasts. "We've seen a decrease in pre-announcements across the board, but especially in positive pre-announcements," Butters said.

Among individual industry groups, thrifts and mortgages are, unsurprisingly, expected to suffer the brunt of the subprime fallout. However, a surprisingly robust investment bank and brokerage sector has made financial a key reason the earnings aren't tracking even worse, Butters said.

Companies such as Goldman Sachs (Charts) and Morgan Stanley (Charts) have already reported upbeat earnings and Merrill Lynch (Charts) - which reports this week - is expected to top estimates handily, due to easy comparisons to the prior year, Butters said.

The investment bank and brokerage stocks are so crucial this quarter that if you stripped out the 7 companies that fall under that category, overall S&P 500 earnings growth would fall to less than 2 percent from 3.3 percent, Butters said.

The question is whether the broadly weaker earnings will spark a stock selloff, or if a slowdown is so anticipated that anything not grim ends up sparking some relieved buying.

Shares of McDonald's (Charts) and Merck (Charts) rallied last week after the two Dow components said earnings will top estimates. Some positive comments from a Cisco (Charts) executive about the company's sales on Friday lifted that stock as well.

"Expectations are so low, we could easily see the earnings end up winning the day," said James Awad, president at Awad Asset Management.

In currency trading, the dollar was little changed versus the yen and fell versus the euro.

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