Will Earnings Doom the Stock Rally?

My colleague Johanna Bennett has a great piece out today (sub required) looking at the impact a middling earnings season could have on the stock market:

Initial reports from�FedEx�(FDX) and�Oracle�(ORCL), both industry bellwethers, missed the mark. And corporate guidance has also grown cautious, according to figures from FactSet.

During the past three months, 86 companies warned investors to expect a first-quarter earnings shortfall, while 24 firms issued positive guidance. That comes to 3.58 negative updates for every positive, the highest ratio since FactSet began tracking the data seven years ago.

Nevertheless, investors have embraced stocks. As of Wednesday’s close, the S&P 500 index has levitated almost 15% since Nov. 15, when the current rally started. The Dow Jones Industrial Average has climbed 16%. And the Nasdaq Composite has risen 13.4%.

Johanna sums up Wall Street views on earnings, with a sense that full-year estimates are perhaps still on the high side. There are of course plenty of reasons to worry: The increasingly long-in-the-tooth nature of the bull market, Europe’s unsolvable troubles, and higher taxes and government spending cuts here in the U.S.

But there are also reasons to be hopeful, for example�Monsanto�(MON) raised full-year outlook on upbeat fiscal second-quarter earnings yesterday, companies are still hoarding cash, and the overall economy does look to be finally coming out of the doldrums.

We’ll know more, of course, once Alcoa (AA) kicks earnings season off on Monday — as Johanna says, what we see may be a key indicator for the market’s (eventual) direction:

Many strategists argue that as a stock-market catalyst, earnings have taken a back seat to the accommodative Federal Reserve.

But eventually, earnings will resume their role as the engine driving the stock market. And that engine needs some gas.