Are you ready for US earnings season

This new week of trading is set to become more volatile as major US corporate firms such as JP Morgan, Goldman Sachs and Intel begin to report their fourth quarter earnings to the market.

So what are the key aspects  of the US earnings season to watch?

Tapering refocuses the mind on core fundamentals

2013 saw global Indices record their best annual gains for some time. The broadest US Index, the S&P 500, rallied 29.6% last year which is its strongest gain since 1997, whilst the blue chip Dow Jones Index also recorded is best annual gains since 1995 of 26.5%. 2013 saw quantitative easing (QE) continue somewhat unexpectedly right through to the end of the year and this surplus of liquidity continued to find its way down the funnel into equities, a factor quickened by the continual improvement of economic data which qualified a faster economic recovery.

Yet 2014 will be vastly different from 2013

In December, the US Federal Reserve announced a tapering of stimulus to the tune of $10bn a month. This, of course, still means that there will be $75bn each month in asset purchases and so actual liquidity injection levels remains extremely high. At the same time the Fed also maintained a pledge to keep interest rates low for a longer period of time. This essentially allowed investors to treat the first taper of stimulus with a ‘so what’ attitude, hence why stock markets continued to rally.

Yet, as 2014 progresses, investors will pay more attention to the core fundamentals of companies and their profit targets as tapering progressively gets pulled back from the markets. In 2013, if a company under-performed consensus estimates, the stock price would suffer a day or two of weakness before bouncing back as investors has QE as an effective stop loss. This won’t be a stop loss in 2014 anymore.

Company earnings need to justify stock market gains

JP Morgan, as just one example, has seen its share price rally 50% since November 2012 (just 14 months) and is now trading at its strongest levels since April 2000, a time when investment firms were banking in a swathe of new IPO deals. Incidentally, global stock indices such as the S&P have surpassed the levels they were in 2000 in the last six months.

Investors buy into stocks on expectations of how the company and its share price will perform 6-12 months down the line. In this sense, with tapering likely to be in progressive effect over the next year, investors will be looking for this earnings season to help pave the way to justify continued exposure in equities for 2014. The flip side to this of course is, have stocks rallied too much too soon? If earnings cannot justify current price levels, a market correction will be due.

Key dates and consensus

In much of the typical vigour we see each quarter, there has been the ‘talking down of expectations’ from both brokers and executives alike in major stocks. Whilst this creates short term trading opportunities to take advantage of price swings in the run up and after a company reports its earnings, longer term traders will do well to ignore the ‘noise’ and focus on fundamentals.

The below is a table of key earnings to watch and their current earnings per share (EPS) consensus according to Thomson Reuters as of 13th January 2.15pm.

Keep up to date with which stocks are reporting earnings each week with our company reporting page.