How Good was the Earnings Season?

MoneyShow's Jim Jubak takes a critical look at the earnings season and shares his thoughts on what it may mean for 2014.

"Earnings for the third quarter are coming in above expectations!" Well, that's how excited you might be if you weren't really paying attention to where expectations were. What we've got, with about 90% of the S&P 500 companies reporting, is, we've got earnings growth, year over year, about 3.7%. That is, indeed, better than the 1% that Wall Street was expecting, but 3.7% growth year over year is certainly nothing to write home about.

Now, the thing about projections is they always start off relatively optimistic and then get, well, more pessimistic or realistic, whatever you want. So, right now, fourth quarter, Wall Street is saying, "Oh, 7% earnings growth." A month ago, they were saying 10%, so we're already starting to come down. I think we'll continue to come down further, so we're looking at maybe another quarter that sort of looks like this one, which is either exciting or not exciting, good or bad news, depending on how you feel about 3.7% earnings growth. It's really not much to look at when you're looking at an S&P that's at a historic high.

Okay, for 2014, right now, the expectations are for about 11% earnings growth. That would be a pretty good year. If you look at that and say, "Oh, okay, so S&P price right now, earnings growth of 11%, it works out to about a 14.8 PE on projected earnings," which really doesn't sound too bad for this market. It would imply that there's room for this market to move up. The question is, of course, how good that projected 11% growth is. The more that comes down, the more that the PE goes up, and the less reasonable the pricing here seems.

So, a lot of this, of course, depends on what your view of the future is. My view of 2014 is that with the Fed beginning the taper and probably bringing its purchase of treasuries and mortgage-backed assets to an end sometime in 2014, without another rate cut from the European Central Bank, with growth in China maybe being set down at 7% as opposed to 7.5%, it's hard for me to see 2014 as being a great year. If that's so, then at current levels, when you ratchet down earnings expectations, the market seems fully priced, so you're not necessarily looking for a big collapse in 2014, but it's hard to figure out exactly why, on the fundamentals, US stocks would go up.

This is Jim Jubak for the MoneyShow.com video network.