It's set to rain on the earnings parade

This year the reporting season is shaping up as pure relief from the relentless complexities of the macro-economic environment in Europe, the US and China.

To the chagrin of many stock-picking investors, however, the relief will be temporary and the profit announcements will have less impact than possibly ever before simply because other forces are at work.

Traditionally the "Big Show", or earnings season, is a chance to review and reset your portfolio. Those companies that beat expectations will outperform the market for the next six months, while those that disappoint will become friendless.

More often than not, the general market manages to beat expectations by between 1 and 2 per cent. Expectations from the financial community are low this season, with overall earnings per share growth forecast to come in between 0 and 2 per cent.

The market is also expecting companies to hose down their numbers for next year due to the benign state of the global and domestic economies. Analysts are looking at 10 per cent earnings per share growth for the 2013 financial year, but this could easily be closer to 5 per cent once the earnings season concludes.

While the earnings season will still see individual stocks pop or flop, regrettably it is unlikely to move the overall market. Last week when I mentioned to a large money manager that I thought earnings didn't matter at this time, he almost choked on his cappuccino.

The reality is the pervading world economic climate will quickly assume control of stock prices once the earnings parade is finished.

The dramatic move in world equity markets last week when the European Central Bank president, Mario Draghi, declared everything possible would be done to keep the euro together, was stark evidence of this.

Another factor weighing against equity markets is seasonality history. According to the analyst Andrew McCauley, August is, on average, the third worst-performing month since 1950 on the US stock market with an average return of minus 0.04 per cent.

Compounding the gloom is September, which is the worst month with a return of minus 0.57 per cent over the same period. In Australia over the past 20 years, August has been the poorest performing month at minus 0.78 per cent while September comes in third-worst at minus 0.33 per cent.

These historical averages dovetail with the fact that all bear markets end with a final desperate plunge, followed by a brutal bounce. Thus forming the classic v-shape bottom.

There are predominantly two drivers of share prices - earnings and value. In bear markets investors tend to ignore the former because they become so pessimistic about the future.

At the top of the cycle the Australian sharemarket was trading on a price to earnings multiple of about 18 times forecast earnings. It is now sitting at about 11.5 times and, if previous bear markets are any guide, will fall to sub 10 times. In other words, much of the downdraft has taken place but there is more to come.

Investors, though, should not be flippant about the upcoming earnings season. The set of numbers about to be printed by Australian companies may not move the dial immediately but they could well be the last value signpost before the market bottoms and, at last, turns higher.