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Earnings season may not be the club for stocks it could have been had the market not gotten so beaten down.

But it could be a period when the stock market is put to the test, as companies discuss trade, slowing global growth and other issues that have shaken investor confidence.

There have been some high profile warnings, like Apple, Constellation, FedEx and Lennar.

Analysts expect that most of the bad news is out on earnings, but if the results and comments are worse than expected, the market could easily retest its lows. On the other hand, if earnings are better-than-expected, they could act as a positive force to help fend off further declines, strategists said.

Fourth quarter reporting season, with major banks releasing numbers next week, will also serve as an important transition period between 2018’s strong double-digit profit growth and 2019’s much slower single-digit pace.

Earnings are expected to be strong, up 14.7 percent in the fourth quarter, but corporate executives will be discussing the activity in the current quarter, which is expected to see much slower profit growth. First quarter earnings are expected to be up around 3.9 percent, according to Thomson Reuters.

But analysts say while the expectations have come down sharply for 2019, so have stock prices, and that could provide breathing room.

“We could see continued volatility, but I think the bar is set so much lower with valuations so much lower than going into Q3 reporting,” said Keith Parker, chief U.S. equities strategist at UBS. “You’ve had such an unwind in the fourth quarter. Momentum stocks were unduly punished and there’s less of an overhang. You put that all together, and it makes the likelihood of a bust, in our view, much less likely. Our view is we’ll probably have more mixed results and guidance going into the quarter, but it does raise the likelihood of relief rallies, given where positions and expectations are.”

For the fourth quarter, at least 72 S&P 500 companies have issued earnings warnings, twice as many as have issued positive guidance, according to FactSet. Earnings growth rates have also been revised lower by companies in all 11 S&P sectors. As of September, earnings for quarter were expected to be up more than 18 percent but that number has been revised down.

“I think the earnings expectations are low enough that people feel they need to exceed those lowered expectations for Q4,” said Sam Stovall, CFRA chief market strategist. “In each of the last 27 quarters, the S&P 500 had earnings that exceeded estimates. So, with the bar having been set lower, I think that investors are expecting Q4 of 2018 to be the 28th consecutive quarter. I think investors are not going to be very forgiving of companies that miss reduced Q4 earnings estimates.”

Stovall said 2019 earnings had been expected to be up 10 percent, as of September, but that forecast has fallen closer to 6.5 percent.

“Stock prices won’t get pounded as much for a miss now since we’ve already gone through corrections or bear markets, depending on the what sectors or stocks you’re looking at. I think investors will sell off shares of companies if they miss their already reduced expectations,” said Stovall.

Tony Roth, chief investment officer at Wilmington Trust, said the earnings season is being overshadowed by issues that are concerning the market, but it could be a positive. “There’s a lot more upside than downside,” he said. “One thing that’s going to temper earnings is the uncertainty around the impact of the federal government shutdown, assuming that continues, and the outlook for trade and tariffs. I think we’re unlikely we’re going to get a significant miss, but it’s very unlikely we’re going to get the kind of beat and raise environment we usually get. Companies are going to be very cautious about providing that kind of guidance.”

Paul Hickey, co-founder of Bespoke, said positive corporate guidance peaked during the summer, and now fewer companies offer upside guidance than lowered guidance.

Source: Bespoke

Hickey said the market looks set to retest the lows of late December. “It’s about seeing how this is going to play out. We’re relatively cautious,” said Hickey. “I think early on in earnings, over the next week or so, if you start to see positive reactions to companies reporting, you won’t get that typical retest you would expect to see.”

“If they’re bad, we’ll see at least a retest of December lows,” he said.

Roth said health care should be a strong setor this earnings season.

“I think you will see a good number beats because the consumer was so strong in the fourth quarter. It could be more in discretionary but it could also be in communications services, in financials. You saw rates come down so there’s a little bit of momentum in housing,” said Roth.

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Apple lays off over 200 from Project Titan autonomous vehicle group

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In August 2018, Apple enlisted a Tesla engineering vice president and Apple veteran, Doug Field, to lead the Titan team alongside Bob Mansfield. This week’s dismissals from the group were seen, internally, as anticipated restructuring under the relatively new leadership.

Other employees who were impacted by the restructuring of Project Titan are staying at Apple, but moving to different parts of the company.

Of late, Apple CEO Tim Cook has touted his company’s initiatives in health as the key to its future growth. “I believe, if you zoom out into the future, and you look back, and you ask the question, “What was Apple’s greatest contribution to mankind?” it will be about health,” Cook told CNBC’s Jim Cramer.

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shares jump despite disappointing earnings

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Company Vice President Sean Kim said the memory demand slowdown would be bigger than expected into the first half of 2019 due to China’s economic slowdown and the U.S.-China “trade situation,” according to Reuters.

Kim’s comments came days after China announced that the country’s economic growth in 2018 was its slowest in nearly three decades. At the same time, Beijing and Washington are attempting to strike a deal amid an ongoing trade dispute which has seen the two largest economies in the world slap billions of dollars worth of tariffs on each other’s goods.

Some analysts were not surprised by the earnings report from SK Hynix.

“(The) results were as expected,” Daniel Yoo, head of global strategy at Kiwoom Securities, told CNBC in an email.

However, he warn that both SK Hynix and its rival Samsung were likely to see their operating profit for the first two quarters of 2019 coming in “less than half of last year’s record high(s).”

Yoo’s sentiments were echoed by Sanjeev Rana, a senior analyst at CLSA.

“I think we have a little bit more pain to go for the next two quarters,” Rana told CNBC’s “Squawk Box” on Thursday.

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Huawei CFO extradition could be complicated: ex-US ambassador to China

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“Whenever a chief executive starts to voice his or her thoughts on the case, that’s a huge additional complication for the prosecution,” Baucus added. “In this case, it’s President Trump’s statement with respect to the Meng case … it makes it harder for the prosecution to get the extradition.”

Earlier this week, Canadian newspaper Global and Mail reported that the U.S. has told Canada it will formally request for Meng’s extradition — though no timeline was specified.

For its part, China has demanded the U.S. drop the extradition request. According to Canada, Beijing detained more than a dozen of its citizens after Meng’s arrest.

Baucus warned that if the U.S. extradition request is granted, it would have a major impact on the U.S.-China relationship.

The world’s two largest economies had been embroiled in a trade war in recent months, which roiled markets and sparked concerns over the health of the global economy. Late last year, Beijing and Washington agreed to a temporary pause on applying new tariffs in order to work out a mutually agreeable trade deal.

Huawei is one of China’s largest companies. The U.S. government has for years taken issue with the tech giant over its alleged espionage ties to the Chinese government and has accused the company of intellectual property theft.

— Reuters and CNBC’s Kate Fazzini contributed to this report.

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