Earnings Season Not Going So Well On The Other Side Of The Pond

Earnings season in the United States is shaping up to be another strong showing for corporate America. Even if a significant part of the nation's citizens aren't doing so great, at least the CEO and executive class is still raking it in, right? In Europe, however, earnings results haven't been so robust. In fact, Europe is on track for its worst earnings season in a decade! According to Bank of America BAC, of the 49 companies that have reported so far, 36.7% have beaten estimates, while a whopping 53.1% of companies have missed expectations. Furthermore, the worst sectors in Europe are the strongest in the United States - discretionary, industrials and staples. Hey, at least this little tidbit should give traders some idea of where they don't want to be when the debt crisis hits our shores. And, no, I am not talking about this little political spat over the debt ceiling, instead I am thinking about the likely real default that will come down the road. The bifurcation in the global economy that is underscored by earnings season in Europe is playing itself out in the forex market and should create more extreme volatility. On the one hand, you have a relatively healthy corporate environment in the United States, which has in many ways been buoyed by Bernanke's weak Dollar policies. Given the stagnant environment for corporate earnings in Europe, corporations would benefit from a weaker Euro, but that would likely imply more chaos in the PIIGS' bond markets - a situation that the EU is desperately trying to alleviate. If they are not successful in calming the debt and contagion fears in the Eurozone, this could lead to a sharp rally in the U.S. Dollar, which will nip corporate profits here. All of a sudden, the United States could find itself in a very similar situation to Europe - weaker corporate profits, rising interest rates, and more quantitative easing to finance the country's debt burden.