Stocks pressured ahead of earnings as job creation weakens

Тhis week precedes the first peak week of quarterly earnings reports, the week when major banks and a handful of Dow components are scheduled to report.

Not only are earnings expected to decline year-over-year for the first quarter — mostly from plunging profits in the energy sector — but a year-over-year decline for the second quarter is also anticipated, signalling an earnings recession, or two consecutive quarters of year-over-year earnings declines. That doesn’t bode well given that fundamentals are expected to play a greater role in supporting stock prices now that quantitative easing has passed and rate hikes are anticipated later this year.

“For Q1 2015 and Q2 2015, analysts are now predicting year-over-year earnings declines of 4.6% and 1.9%, respectively,” said John Butters, senior earnings analyst at FactSet, in a recent note. “On December 31, analysts were projecting growth of 4.3% and 5.3% for these same two quarters.”

Given the wide swing of earnings estimates over the first quarter alone, analyst expectations of low-to-mid single digit earnings gains in the third and fourth quarters offer little assurance, especially with the expected rate hikes.

Dovish signals from the Fed in mid-March may have given stocks a temporary boost, but investors are faced with a tough decision on how to play the remainder of the year. Minutes from the mid-March Federal Open Market Committee meeting come out on Wednesday.

“And with the Q1 2015 EPS reporting season soon to be upon us, investors will need to decide if the precipitous decline in 2015 EPS growth estimate foretells the approach of an overall [profit] recession, or merely a slowing of the profit sprint, as a result of running out of Energy,” said Sam Stovall, U.S. equity strategist at S&P Capital IQ, in a recent note.

Only a few S&P 500 SPX, +0.35% companies report earnings this week. On Wednesday, Alcoa Inc. AA, +0.23% reports after the closing bell, along with Bed Bath & Beyond Inc. BBBY, +0.62% On Thursday, Constellation Brands Inc. STZ, +1.32% reports before the open.

Other companies scheduled to report include Family Dollar Stores Inc. FDO, -0.04% Pier 1 Imports Inc. PIR, -0.15% and Rite Aid Corp. RAD, +2.57% on Wednesday, and Walgreens Boots Alliance Inc. WBA, +2.03% on Thursday.