The Economy and Earnings in the Week Ahead
July 16, 2012

Week Ahead: Bernanke May Provide Direction for Market!

Earnings Promise Busy Week!

by Ian Harvey

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The Key Events in the Week Ahead

July 16, 2012

Introduction

Investors are looking at an onslaught in the week ahead -- corporate earnings -- Ben Bernanke talking about economic issues before Congress.

With a slew of companies set to report results in the week ahead, the hope among investors is that the bad news has been factored in, but the broader picture remains lackluster. That may limit the market's gains even if companies clear a low bar.

While earnings news may or may not confirm the slowing economy, it is Bernanke’s testimony that could help set expectations for the rest of the summer.

However, at this point-of-time, expectations are nearing a low -- global slowdown being a major factor!

Data showing slower growth in Europe, China and the United States has weighed on the stock market, while U.S. companies have warned about overseas weakness and a stronger dollar hurting profits on exports.

The minutes from the Federal Reserve's June meeting suggested it is not ready to inject more monetary stimulus into the economy, but traders will be hanging on Federal Reserve Chairman Ben Bernanke's every word for mention of such a possibility and how he views the slowing economy.

Earnings in the Week Ahead

There are earnings expected from dozens of major companies such as Coca-Cola (KO), American Express, Bank of America (BAC), Microsoft (MSFT), IBM, Intel (INTC) and General Electric (GE).

Major Earnings in the Week Ahead

There might be some good news in the numbers, outside of the companies heavily impacted by Europe. On the margin, expectations for earnings in the week ahead -- and there will be 80 S&P companies reporting—are so low that there’s a real chance for some upside surprises.

Earnings estimates have already fallen sharply. S&P 500 earnings for the second quarter now are expected to rise just 5 percent from a year ago, down from an estimate of 9.2 percent at the beginning of April, according to Thomson Reuters data.

Nearly all sectors have seen estimates fall due in part to weak demand in Europe. Energy and utilities are expected to be the weakest performers this quarter after big declines in energy prices in the second quarter.

The fall in estimates could be enough so that the majority of companies end up beating expectations, as they typically do, inspiring a relief rally. That could bolster the S&P, where trading has narrowed to a range between 1,310 and 1,370 for most of a month.

Investors could see some downside surprises in high-end consumer companies, industrials and financials -- for example -- Bank of America Inc (BAC) is expected to report earnings of 15 cents a share on Wednesday, but Thomson Reuters StarMine's SmartEstimates put expectations at 13.5 cents per share, or a miss of about 9 percent.

The technology sector could end up being mixed --on one hand, there are very good trends on the software side. (But) there may be some disappointments among some of the hardware manufacturers -- weak PC sales.

Besides Advanced Micro Devices, a weak forecast was issued by fellow chipmaker Applied Materials (AMAT) this past week, while engine maker Cummins Inc (CMI) warned on sales. AMD reports results on Thursday.

Negative to positive earnings guidance for the second quarter is 3.3 to 1, the worst since 2008, Thomson Reuters data showed.

Among other S&P companies scheduled to report are Goldman Sachs (GS), Citigroup (C) and Johnson & Johnson (JNJ).


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Economy in the Week Ahead

Besides Bernanke, there is a busy economic calendar, starting with Monday’s retail sales; the Consumer Price Index (CPI) on Tuesday; housing starts on Wednesday; and existing-home sales and the Philadelphia Federal Reserve Banks's manufacturing index on Thursday.

The Fed releases its Beige Book report on Thursday.

Bernanke is due to deliver his semiannual monetary policy report to Senate and House committees on Tuesday and Wednesday, though analysts said he is not likely to divulge plans of further economic stimulus.

Stocks lost ground in the past week as minutes from the Fed's June meeting showed policymakers are open to the idea of more economic stimulus, but that conditions might need to worsen first. Investors were hoping the Fed's June minutes would suggest the central bank was getting closer to another round of stimulus.

It appears that Bernanke will not be alluding to any quantitative easing – he is more apt to urge Congress to act on fiscal policy and tackle the issues of huge budget deficits and the impact on the economy of approaching sharp cuts in government spending known as "the "fiscal cliff."

Here is a brief list of some of the key events in the week ahead.

All earnings dates listed below are tentative and subject to change. Please check with each company's respective website for official reporting dates.

Monday

Earnings: Citigroup (C), Charles Schwab, Gannett, Lincare Holdings

Economy:

• 8.30 am Retail sales

• 8.30 am Empire state survey

• 10.00 am Business inventories

Tuesday

Earnings: Goldman Sachs (GS), Intel, (INTC), Johnson & Johnson (JNJ), Coca-Cola (KO),Yahoo (YHOO), State Street, Intel, CSX, Mattel, Mosaic, Comerica and Forest Labs.

Economy:

• 8.30 am CPI

• 9.00 am Treasury TIC data

• 9.15 am Industrial production

• 10.00 am NAHB housing survey

• 10.00 am Fed Chairman Ben Bernanke economic testimony before Senate committee

• 1.15 pm Cleveland Fed President Sandra Pianalto speaks

Wednesday

Earnings: Bank of America (BAC), IBM (IBM), eBay (EBAY), Yum! Brands (YUM), American Express, Abbott Labs, BlackRock, US Bancorp, PNC, Northern Trust, Bank of NY Mellon, Stryker, Qualcomm, Kinder Morgan, Noble Corp, SLM

Economy:

• 7.00 am Mortgage applications

• 8.30 am Housing starts

• 8.30 am Building permits

• 10.00 am Bernanke economic testimony before House committee

• 2.00 pm Fed’s Beige book

Thursday

Earnings: Microsoft (MSFT), Google (GOOG), Sherwin-Williams (SHW), Travelers, Verizon, Morgan Stanley, Philip Morris, Blackstone, Southwest Airlines, Nokia, AutoNation, Baxter, Chipotle Mexican Grill, Capital One, Intuitive Surgical

Economy:

• 8.30 am Jobless claims

• 10.00 am Philadelphia Fed survey

• 10.00 am Existing home sales

• 10.00 an Leading indicators

Friday

Earnings: General Electric (GE), Schlumberger (SLB), Xerox (XRX), SunTrust, Ingersoll-Rand, Baker Hughes

Economy:

• No major economic reports today

CLICK HERE for a complete list of companies reporting in the week ahead.


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The final details of a Spanish bank bailout are expected in the week ahead among developments in the 2 1/2-year old euro zone debt crisis.

Conclusion

Expectations have been coming down for the second quarter, and as of now, earnings for the S&P 500 are expected to show a decline of 2.25 percent. It is important to note that in the last five quarters, earnings averaged a 4 percent improvement over expectations.

Most sectors are expected to show declines this quarter, the worst of which is expected to be energy, down 20 percent. Only three sectors are expected to show an increase—consumer staples, industrials and technology.

From here to the end of the year, there could be a movement to the upside for equities – there is positive growth in earnings for the full-year and sentiment is off-the-charts negative – therefore, if a recession is avoided in the U.S., positive returns for equities is extremely likely.

Other Important Articles Relating to the Week Ahead

1. The Week Ahead in the Stock Market – July 16, 2012

2. The Major ETFs in the Week Ahead – July 16, 2012

3. The Past Week Stock Market Results – July 16, 2012


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