"In Q4, you usually get the lowest year-over-year percent change but the highest variability in returns because sometimes people throw in the kitchen sink. This quarter there was Sandy and the cliff, and to a much lesser extent a stronger dollar, but also a tail wind was the near 8 percent decline in the average cost of oil in the fourth quarter versus the fourth quarter of 2011," Stovall said.
The Dow fell 50 to 13,384, and the S&P 500 fell 4 to 1461 Monday, reversing some of the games that took the S&P to a five–year high last week.
Stovall said companies saw revenue growth of just 0.5 percent in the third quarter. "I think that's the big worry. How much longer can they continue to miss on the top side but exceed on the bottom line. Sooner or later you're going to run out of costs to cut, and you're going to run out of shares to buy back. I would not be surprised if this quarter tends to be disappointing from a revenue perspective due to Sandy and the fiscal cliff," he said. "The reason the market could be down today is we did so well last week in response to the postponement of the fiscal cliff but people are now positioning themselves for the beginning of Q4 earnings reporting."
(Read more: What Earnings Season Means for the Euro)
Stovall said he believes the earnings slump bottomed in the second quarter, which had the most sluggish profit growth.
Joel Levington, managing director of corporate credit at Brookfield Investment Management, said he expects earnings growth to be flat to single digits for the fourth quarter. "In some ways, it's a throw away quarter because there were so many events that happened, whether you're talking about the fiscal cliff or Sandy. I think what's more important is the guidance for 2013 and we just don't view it as a healthy year for growth," he said. He also expects to see old line industry names make adjustments in the fourth quarter for pension liabilities.
"I think what will be interesting is I believe only about 15 percent have given guidance for 2013, so a lot of fourth quarter calls could throw out that guidance," he said, adding he expects to see earnings decline in the low single digits for the year.
Jim Paulsen, chief investment strategist at Wells Capital Management, expects earnings to be up just slightly for the fourth quarter, but he said companies may be more positive than investors expect.
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"The most interesting thing will be what will the CEOs view of the future be," he said. "We might see that change for the positive finally.It's been negative of the past few quarters and there were so many things that caused sentiment to be negative…many of those things turned out better."Paulsen pointed to the U.S. economy, and the improvement in housing. He also said there are signs China has turned the corner, and Europe is handling its crisis better.
Paulsen also believes the market could continue to advance toward 1500 on the S&P, but it could stall out once Congress begins to deal with the debt ceiling limit in February or March.
What to Watch
Tuesday kicks off the earnings season with Alcoa, the first Dow stock to report. According to Thomson Reuters, it is expected to report earnings of six cents a share on revenues of $5.6 billion. The revenues are seven percent below last year's level and the per share profits compare to a three-cent loss per share last year.
"I think there's a very strong indication that they will be crossed over to high yield after their earnings," said Levington. Alcoa is now rated triple B. "I think the first step is high yield and seeing them go into double B," the first level of high yield, he said. "The rating agencies tend to be much more willing to go down once they're out of investment grade."
Levington said he has been bearish on Alcoa for a long time,and he expects it to have a slight loss. "Their interest coverage was 2.3 times for the third quarter, and the debt to EBITDA was over five times. Those are more traditional ratios with a single B credit," he said. Moody's in mid-December placed Alcoa's Baa3 rating under review for downgrade, on $8.3 billion of debt. Moody's said the recovery in aluminum is "slow and uneven" and it sees pricing pressure.
"There are sectors that are going to see some dramatic declines in earnings and that should put pressure on ratings. Metals and minings hould see a pretty poor quarter. That's a sector that's going to come under a fair amount of pressure in terms of ratings," he said.
(Read more: The Key to Earnings Season: Banks)
But one sector that Levington said should do well is hotels,including Starwood, Marriott and others. "Leisure travel is still doing well,"Levington said. "With less capacity, you gain pricing. We would expect to see a good percentage of rev par (revenues per available room) growth."
Technology should be interesting because of its guidance. "I think you could see some significant deviation in fourth quarter results and guidance," Levington said.
Stovall said seven of the 10 major S&P sectors are expected to show improvements, led by consumer discretionary, financials and telecoms. The industrials, health care and technology are expected to have declines.
Paulsen said energy company earnings could be rocky because of weaker pricing in the fourth quarter, but they should be offset by gains in financials. "Tech is more difficult only because the stocks tell you it was. I think consumer cyclicals, retail is going to have some upside surprises. You're certainly going to see upside in housing and auto areas. I think the financials are going to have a pretty good quarter. Lending continues to rise. Mortgage activity continues to rise," he said. "The wild card to me is health care."
Other companies reporting earnings Tuesday include Monsanto,Acuity Brands, and Apollo Group. There is also the NFIB small business survey at 7:30 a.m. ET, and the auction of $32 billion in 3-year notes at 1 p.m.
Yum will also be on the list of companies getting attention due to earnings. After the bell Monday, Yum said its earnings will be $3.24 per share for the year, weaker than expected. Yum blamed a decline of six percent in fourth-quarter same-store sales in China, below its earlier forecast for a four-percent decline.
