by Ian Harvey
April 11, 2015
The week ahead in the stock market will see the first big wave of earnings reports, with the major banks and financials such as J.P. Morgan, Wells Fargo and American Express, along with blue chip companies like Intel and Johnson & Johnson taking the spotlight.
Besides earnings in the week ahead in the stock market, there will be a number of important economic reports on the table, including retail sales for March on Tuesday and industrial production on Wednesday, as well as producer inflation and consumer inflation data on Tuesday and Friday.
Last week the U.S. stocks closed higher on Friday, with the Dow topping 18,000 for the first time in April. It appears that Wall Street is temporarily putting the U.S. Federal Reserve and macroeconomic policy on the back burner in favor of a focus on individual company results and forecasts for a pulse on the economy's health.
Even though profits of companies on the S&P 500 are projected to have declined by 2.9 percent in the first three months from a year ago, strategists expect that earnings will continue to top Wall Street forecasts – as it had previously achieved quarter after quarter – and will do so even if profits fall below last year's level.
It is likely that the market will stay range-bound until further into the earnings season, where the companies will sharply beat the reduced guidance – this will open the way ahead for the market to move forward into a continued rally. Some specific strategies could be helpful at this stage to handle this situation and boost profits.
The slow growing first quarter will provide for the spring rebound as the earnings decline will come to an end in the second half.
Stocks recently have struggled against a stronger dollar, but this past week was also good for the greenback. The dollar index gained 1.8 percent for the week to just over 99.30, as of the stock market close on Friday.
There are several catalysts that will come into play to break this market side-ways movement:-
• The growing realization that recent softness in the economic data — specifically inflation measures and the March payroll report — is likely to push back the timing of any Federal Reserve interest-rate hike until September at the earliest.
• Confidence is being boosted with some good headlines – such as the high profile M&A’s, especially the Shell deal.
• Fair to positive economic data and signs of global recovery also helped equities gain.
The result of this is that investors are moving into pro-cyclical areas of the market that have recent fallen into short-term oversold conditions – such as energy and semiconductors.
The week ahead in the stock market has a full economic calendar with the Producer price index, Retail Sales, and Business Inventories out on Tuesday. This is followed by the Empire State Manufacturing Survey, Industrial Production, and the Housing Market Index on Wednesday.
A handful of Fed officials are also speaking, most importantly Fed Vice Chairman Stanley Fischer, who will attend the IMF spring meeting Wednesday and Thursday.
The 'European Central Bank - ECB' also meets Wednesday, and it is not expected to take action but will discuss its quantitative easing program.
Economic data has taken on even more importance after the Fed last month said it is likely to raise rates this year, and its decision will be based on the performance of the economy.
It is expected that retail sales should be an up number after a couple months of down numbers, which will help give a positive view that the U.S. consumer hasn't abandoned the cause.
Furthermore, most economists and analysts believe the weak March labor report was an anomaly, a once-off that shouldn’t be given too much weight as investors mull strategy moving forward in 2015.
The week ahead in the stock market will see earnings season hit full stride with 15 companies reporting on Tuesday and 46 on Wednesday. The season peaks on April 30 when 392 companies report.
Although Alcoa Inc (AA) unofficially kicked the Q1 reporting season off on April 8, the volume of action will pick up in the week ahead with financial, technology, and industrial names prominently featured.
While some companies have already reported their quarterly earnings, the official start to earnings season is usually marked by reports of Dow components JPMorgan Chase (JPM) and Intel (INTC) next Tuesday.
Big banks will start reporting their quarterly earnings on Tuesday, starting with JPMorgan Chase & Co and Wells Fargo & Co – and mortgage lending will help boost the earnings results -- financials have the rosiest outlook among sectors, with analysts projecting first-quarter 2015 earnings to have surged 10.8 percent from a year ago, according to Thomson Reuters data.
In energy, the worst-performing sector, companies may see first-quarter earnings plummet 64.3 percent from the same quarter a year ago, according to analyst estimates.
A positive twist to the continued lowering of earnings expectations is that with very weak numbers being already factored in, some of the beaten down stocks could surprise. Negative guidance lowers the hurdles, making upside surprises and post-earnings stock price gains easier.
The choppy market conditions are likely to continue for awhile yet. The hit to earnings has largely been in the energy sector, due to the steep drop in oil prices. However, the strong dollar has also been a factor that is expected to eat into profits of multinationals that make revenues overseas.
The market is expected to move away from the focus on the Fed and start to further concentrate on fundamentals which will be a driving force behind general investor confidence.
Companies Reporting In The week Ahead in the Stock Market
Monday: Commerce Bancshares, Pep Boys
Tuesday: JP Morgan Chase, Wells Fargo, Johnson & Johnson, Intel, CSX, Linear Tech, JB Hunt Transportation, Fastenal
Wednesday: Bank of America, US Bancorp, Burberry, Charles Schwab, PNC Financial, Netflix, SanDisk, Universal Forest Products, Progressive, ASML Holdings
Thursday: BlackRock, Citigroup, Goldman Sachs, Blackstone, American Express, Schlumberger, Celanese, Crown Holdings, UnitedHealth, Taiwan Semiconductor, Philip Morris, First Republic Bank, KeyCorp, Mattel, Sherwin-Williams, Sonoco Products, PPG Industries, WW Grainger
Friday: GE, Honeywell, Synchrony Financial, Comerica
Stocks to Consider
Companies to consider for Trading, such as “Options Trades” – calls or puts -- this week are:-
Apple (AAPL) will be in focus as it began taking pre-orders of its smartwatch on Friday.
Citi upgraded Netflix to "buy" from "neutral," saying it doesn't share competition concerns that are currently reflected in the stock's price.
Wells Fargo (WFC) energy conference which will allow many companies to give their perspective on where they think oil is headed.
General Electric Friday announced a $50 billion buyback, on par with the largest-ever buyback of the same size announced by Apple two years ago. Buybacks give companies smaller float and help on the earnings side, with a small share count boosting earnings per share.
Delta will probably provide a lift for the transport sector.
Citigroup seems to be on the positive side with better organization.
UnitedHealth Group should provide solid numbers as part of the healthcare stocks which have been performing well lately.
Honeywell should provide solid earnings.
Two sectors – transportation and auto – could emerge as big winners, turning out to be the major contributors to earnings.
Transportation -- SPDR S&P Transportation ETF (XTN) and iShares Dow Jones Transportation Average Fund (IYT).
Auotomotive --First Trust NASDAQ Global Auto ETF (CARZ) The U.S. automotive sector has been growing rapidly over the past one year. A lower interest on auto loans, lower gasoline prices, a plethora of new models, need for replacement of aging vehicles and rising consumer spending are driving the industry’s sales higher.
It is important that the investor, for the week ahead in the stock market, instead of spending too much time concerned with the mixed bag of recent economic data, need to focus on companies affecting their portfolios and apply logical action.
Despite the mixed macroeconomic reports, there are reasons why stocks should rise during earnings season, particularly after the significant drops in the indices in March – expect individual stocks to make new highs and it is probable that the indexes will reach new highs as well.
The past week has seen a major positive trend emerge with the equity-only put-call ratios turning bullish -- a gradual rotation back into the larger-cap stocks is likely as the small-caps stalled a bit last week.
Overall, the experts say things may get rough for a while, but that most long-term indicators suggest the economy is headed in the right direction and that stocks will fall in line with the broader trend.