Monday, October 10th, 2011
U.S. stock investors are looking to quarterly earnings results, which will increase in intensity this week, as a distraction from Europe‘s debt wrangling and reason to extend the past week’s gains.
The unofficial start of reporting season begins on Tuesday, when Dow component Alcoa (AA) reports third-quarter results after the close of trading followed by J.P. Morgan Chase (JPM) and Google (GOOG) on Thursday.
Results from the trio should offer investors a sense of whether companies have been able to override the economic and political challenges of the past three months, which have made some companies and consumers more reluctant to spend.
“Stocks will recover from earnings for the time being, but I don’t believe it’ll be a new bull market long-term,” said Keith Springer, president of Springer Financial Advisors. “I simply feel sentiment has swung so far negative that it’s not going to be hard to beat it on the upside. People are just ready to jump off a cliff.”
Will Earnings be Upset By European Woes?
Investors tiring of the euro zone's debt crisis dragging the market all over the place are hoping to focus on something else next week — earnings.
But will third-quarter results be enough to drive the S&P 500 higher? Or will Europe's woes get in the way?
The earnings and guidance that may follow could give investors some clues on the health of the global economy, including any impact the euro-zone debt crisis has had and might continue to have on profits.
But even if results paint a rosier picture than anticipated, stocks may face a stiff test in climbing much further, as analysts pointed to the declining 50-day moving average as a key resistance point that could limit gains. That level now sits around 1,178.
This week's sharp gains were built on improved hopes that European officials will get a handle on the euro-zone debt crisis. That fed a massive bout of short-covering as those betting against stocks were forced to buy shares to avoid losing money.
The benchmark S&P 500 index (SPX) rose 2.1 percent for the week, buoyed by a 6-percent jump mid-week, as it appeared plans in the euro zone to get a grip on the debt crisis were moving forward. The region remains a wild card, which could cause any gains to quickly vanish.
"For the next three weeks, in this country, earnings will be the focus and the subplot is going to be Europe — Europe is always going to be just under the surface," said Ken Polcari, managing director at ICAP Equities in New York. "But if all of a sudden in the middle of next week, some catastrophe happens in Europe, the focus is immediately going to be headline driven and goes back to Europe."
Results this Week
Earnings Growth and Its Impact!
Earnings are likely to play a big role in the week ahead. While a slightly faster pace of growth is expected compared to the second quarter, forecasts have cooled since June. Analysts polled by FactSet have reduced their expectations of year-on-year growth for S&P 500 (SPX) companies to a rise of 12% from 16.5% at the beginning of the third quarter.
Just last week, growth estimates dropped a percentage point, from 13.1%, led by downward revisions in financials. Analysts slashed their forecasts for Goldman Sachs Group Inc. (GS) 51%, to 23 cents from 47 cents, while American International Group Inc.’s (AIG) outlook was lowered to 36 cents from 46 cents.
Still, third-quarter earnings growth is expected to slightly outpace the second quarter’s 11.4% year-over-year growth. Some analysts say strong corporate earnings will give stocks a temporary lift after major U.S. indexes almost dipped into bear market territory this week.
Doug Cote, market strategist at ING Investment Management, said stocks are likely to keep rallying if fundamentals -- that is, manufacturing data and results -- continue marching forward. He expects another strong cycle.
“The key catalyst for company growth is the emerging markets,” Cote said. “U.S. corporations are the biggest beneficiary of double-digit growth in emerging markets.”
Analysts are forecasting the biggest profit growth for the energy sector. The group's are expected to expand 42.5%, powered by Exxon Mobil Corp.'s (XOM) and Chevron Corp.'s (CVX) results. Analysts are expecting materials companies to post 31.9% growth, buoyed by Alcoa and Dow Chemical Co. (DOW).
The utilities and health-care sectors are expected to have the worst earnings performance, according to FactSet, with utilities declining 0.9% and health care adding 2%.
Apart from earnings, investors should focus closely on companies' outlooks for the end of 2011 and the beginning of 2012, said Bill Ryder of RiverFront Investment Group.
"What's more important to watch in this earnings season is the way companies guide how they'll deal with next year, given the fact that we're in this new environment where the best U.S. GDP [gross domestic product] can grow is 1% to 2% every quarter," Ryder said, noting that corporate profit margins are still unsustainably high.
Focus on the Future
Clouding the picture for profits is the fact that many estimates have been trimmed by analysts in light of the turmoil in Europe, a staggering global economy and other events which resulted in a more cautious forecast.
"You've got to remember what was going on in July with the debt-ceiling crisis, credit default -- companies were not willing to go out on a limb and make any big expectations," said Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co. in San Francisco.
"So they were conservative going in, and we have not seen a whole lot of downward revisions, which suggests companies are probably going to be able to make those numbers."
"That is all we really need in order to get beyond this, and start focusing on the future and focusing on our own data. We have plenty of data that suggests slow growth, but nothing that suggests waving the red flag like a crazy person saying, 'How can you not see this?'"
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