NEW YORK (MarketWatch) -- Investors, who have turned more cautious about the U.S. economy, will turn to next week's kickoff of earnings season full of hope that market expectations have been taken down enough to help stocks return to their winning ways.
"Over the past couple of weeks, we've been going through the digestion phase of the July-to-September gains and now the market is looking for reasons to become optimistic again," said Sam Stovall, market strategist at Standard & Poor's.
On the face of it, things were still bleak for corporate America in the third quarter.
Alcoa Inc. (AA 12.91, +0.09, +0.70%) will play its traditional role as the first blue-chip company to report results on Wednesday. The aluminum giant, seen as a barometer for the economy, is expected to post another staggering loss, reflecting the overall performance of the materials sector. See full story.
On average, earnings at S&P 500 firms are expected to be down by 24.8% from the year earlier quarter, marking the ninth consecutive quarter of negative earnings growth, according to Thomson Reuters.
And there have been only a few downward revisions to estimates from analysts or companies. At the start of the quarter, earnings were expected to be down 20.9%. Lowering expectations tends to help stocks when the actual results come out.
"But the trend [of revisions] is similar to what we saw in the second quarter," said John Butters, financials analyst at Thomson. "And in that quarter, we saw 73% of companies topping expectations, the largest percentage since the first quarter of 2004."
And companies on average topped expectations by a huge 13.4%, helping the market continue its rally through the summer and into September.
"With the Dow falling in the past two weeks, the market has been discounting some possible disappointments in earnings, so that when they come out, we may see the rally resume," said Ken Tower, market strategist at Quantitative Analysis Service.
Jobs and profits
SPX 1,025, -4.64, -0.45%
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Stocks stumbled over the past week, marking the second consecutive week of decline, with a series of disappointing reports raising questions about the hoped-for economic recovery.
Yet on Friday, after heavy losses in the previous session, news that the economy shed a worse-than-expected 263,000 jobs in September failed to rock the market too hard.
The Dow Jones Industrial Average (INDU 9,488, -21.76, -0.23%) lost 21.61 points, or 0.2%, to finish at 9,487.67. The S&P 500 index (SPX 1,025, -4.64, -0.45%) fell 4.64 points, or 0.5%, to end at 1,025.21, while the Nasdaq Composite (COMP 2,048, -9.37, -0.46%) dipped 9.37 points, or 0.5%, to 2,048.11.
For the week, both the Dow and the S&P fell 1.8% and the Nasdaq lost 2%.
