LAST year finished on a high note for global equity markets and this euphoria carried through into the first week of 2010. But after having shot out of their starting blocks, equities have clipped the first hurdle as the fourth quarter earnings season kicked off in the US. Aluminium giant Alcoa rattled investors with numbers below expectations. Homebuilder KB Homes posted its first profit in three years but gave a downbeat outlook while Intel’s results were strong but the stock was sold off anyway. And then banking giant JP Morgan’s revenue miss triggered a 100-point fall in the Dow last Friday.

The next fortnight’s results will give us a clearer picture of the health of the US corporate sector. Expectation-beating results from the last three earnings seasons have helped to drive equities higher, but some argued that estimates were far too low. Analysts realised that they had miscalculated the effect of the financial collapse on corporate earnings and consequently slashed their forecasts.

Since April, companies have easily hit these beaten-down bottom line targets by slashing overheads and cutting staff. But commentators have repeatedly warned that investors will need to see a pick-up in sales at some stage. Revenue growth is the clearest indicator that the economy is improving and there’s a limit to how much a company can cut costs. This time, revenues really do matter, but the danger is that they will be just as elusive as they were throughout 2009.

Adding to investors’ worries is the Fed’s purchase of $1.3 trillion of mortgage-backed securities which will come to an end in March. If unwound as planned, it will remove a vital crutch currently supporting the mortgage market. There is talk that the Fed will extend the programme, but this would send the message that intervention hasn’t worked. Either way, the outlook for equities is unsettled.