What to watch for as US earnings news rolls in

With fourth-quarter earnings season hitting its stride, investors are returning to the familiar comfort of cold, hard numbers—the press releases, conference calls and spreadsheets that provide a real view of corporate America’s performance.

Trading has been dominated for months by speculation about news events: Washington’s perpetual state of gridlock, the impact of Superstorm Sandy on the Northeast, the international economic slowdown. Earnings give professional market watchers something tangible to analyse.

“A lot of people like to trade around earnings because there are a lot of short-term opportunities there,” says Randy Frederick, managing director of active trading and derivatives at Charles Schwab. “We’re just starting to get into earnings in a big way this week, so there are plenty of ways to do that.”

This week will bring answers to questions that have hung over the market for months: Will slower growth in China put a dent in big US companies’ income? Will new housing numbers come in strong enough to keep homebuilders flying high? How much did Superstorm Sandy cost big insurers? Here’s a guide to some of the big stories that professional investors will be watching as the earnings news arrives:

Housing rally—How long?
The government said Thursday that US builders started work on homes in December at the fastest pace in 4 ½ years, and that last year was the best year for residential construction since the early stages of the housing crisis.

It was the latest announcement to lift homebuilder stocks, which have been rising as evidence mounts that the housing market has finally regained some momentum. Homebuilders in the Standard & Poor’s 500 index have shot up 23 per cent since their recent low on November 14. Already this month, seven homebuilders have hit 52-week highs on heavy trading volume.

Yet some have been reluctant to trust the turnaround. In an earnings call with analysts last week, Citigroup Chief Financial Officer John Gerspach said his bank won’t start to release billions in reserves held against mortgage losses until it’s clear that the trend is sustainable.

This week brings more data on sales of new and existing homes in December. If the numbers look weak, analysts say, homebuilder stocks may appear overbid and the rally may pause until earnings results arrive from big players like DR Horton Inc (January 29) and PulteGroup Inc. (January 31).

The China Question
Big US companies are increasingly reliant on sales to China, and growth there appears to be slowing. This round of earnings will shed light on how hard the slowdown is hitting American companies. The messages so far are mixed. When Alcoa announced its results on January 8, executives said they expect sales to grow by seven to ten per cent in 2013, thanks to “the wealthier middle class” and “the general uptick in the Chinese economy.”

Announcing its fiscal second-quarter results last month, however, Nike said China was the only region where revenue declined. Executives said they expect lower income from China in the coming quarters as they work to build a strategy around Chinese consumers.
Traders will learn more from earnings announcements by companies like McDonald’s (on Wednesday) and 3M (on Thursday).