Earnings season may not be the club for stocks it could have been had the market not gotten so beaten down.
But it could be a period when the stock market is put to the test, as companies discuss trade, slowing global growth and other issues that have shaken investor confidence.
Analysts expect that most of the bad news is out on earnings, but if the results and comments are worse than expected, the market could easily retest its lows. On the other hand, if earnings are better than expected, they could act as a positive force to help fend off further declines, strategists said.
Fourth-quarter reporting season, with major banks releasing numbers next week, will also serve as an important transition period between 2018's strong double-digit profit growth and 2019's much slower single-digit pace.
Earnings are expected to be strong, up 14.7 percent in the fourth quarter, but corporate executives will be discussing the activity in the current quarter, which is expected to see much slower profit growth. First-quarter earnings are expected to be up around 3.9 percent, according to Thomson Reuters.
But analysts say while the expectations have come down sharply for 2019, so have stock prices, and that could provide breathing room.
For the fourth quarter, at least 72 S&P 500 companies have issued earnings warnings, twice as many as have issued positive guidance, according to FactSet. Earnings growth rates have also been revised lower by companies in all 11 S&P sectors. As of September, earnings for the quarter were expected to be up more than 18 percent, but that number has been revised down.
"I think the earnings expectations are low enough that people feel they need to exceed those lowered expectations for Q4," said Sam Stovall, CFRA chief market strategist. "In each of the last 27 quarters, the S&P 500 had earnings that exceeded estimates. So, with the bar having been set lower, I think that investors are expecting Q4 of 2018 to be the 28th consecutive quarter. I think investors are not going to be very forgiving of companies that miss reduced Q4 earnings estimates."
Stovall said 2019 earnings had been expected to be up 10 percent, as of September, but that forecast has fallen closer to 6.5 percent.
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