Get ready for the earnings

Intel, Apple, Citigroup and GE lead the list of companies reporting 4Q results in the week ahead. Will they disappoint?

By Alexandra Twin, CNNMoney.com senior writer
January 14 2007: 10:22 AM EST


NEW YORK (CNNMoney.com) -- With the Dow industrials standing at a record high, oil prices at multi-month lows and the economy chugging along at a better pace than what some had been expecting, it's hard to see what could upset stock investors.

After a few scattered reports this week, next week brings the first significant wave of fourth-quarter earnings, with 43 of the S&P 500 companies set to release results. Intel (Charts), Apple (Charts), Citigroup (Charts), General Electric (Charts) are among the large, widely-traded U.S. companies due to report. (See chart for details.)

Many individual company earnings released over the next month will impress, as has been the case in recent years. Yet, overall S&P 500 earnings growth in the quarter is expected to grow at the slowest rate in 4-1/2 years, according to a recent report from Standard & Poor's.

Earnings are currently on track to grow less than 10 percent from a year ago, giving the S&P 500 index its first quarter of single-digit growth since the first quarter of 2002.

Danger ahead on Wall Street?
While this factor isn't likely to throw a wrench into the rally, it is nonetheless a negative that investors don't seem to be paying attention to, some market watchers say.

"For at least three years, analysts have been saying that earnings growth will slow and it hasn't really that much," said Dan Genter, president and CEO at RNC Genter Capital Management. "This year, it may really happen, and investors haven't fully digested that."

The earnings and oil price connection
Earnings are bound to slow because of tougher comparisons after several strong years, because the economy is slowing and oil company profit growth is set to do the same.

Sustained higher global oil prices drove oil company profits higher over the last few years, with the energy sector leading all other major S&P sectors in earnings growth in 2004 and 2005.

But crude oil prices have slumped more than 30 percent since last July. While that's been good for consumer spending, inflation and the stock market over the last six months, it hasn't been as good for oil companies.

Energy sector earnings are expected to have fallen 10 percent in the fourth quarter, according to earnings tracker Thomson Financial/First Call. It will be the first quarter of earnings contraction for the sector since the third quarter of 2002, said Thomson research analyst John Butters.

If the S&P 500's big earnings engine driver stalls, overall earnings are likely to slow also.

Butters said that the materials and financial sectors are set to show the most growth in the fourth quarter. However, the materials sector is small, with financials "really driving the overall growth," Butters said.

Strip out financials, and overall 4Q earnings would be on track to rise only 1.9 percent.

Whether the broad slowdown in earnings growth will upset stock investors over the next month is unclear.

"I think the 4Q earnings are only a factor if they miss by a lot," said Barry Hyman, equity strategist at EKN Financial Services. "We're used to earnings beating forecasts, that's the norm. If they don't, then there could be an issue."

Eye on the economy, the Fed
Recent economic reports have suggested that the economy was stronger in the fourth quarter than some had expected, although not so strong as to raise worries that the Federal Reserve would have to start raising interest rates again.

After boosting a key short-term interest rate for more than two years, the Federal Reserve has held rates steady for the last four policy meetings. Stock investors are hoping that at whatever point the bankers make a move, the move is to cut.

Congress may add a day to Fed hearings
Bets that the bankers would cut as soon as the first quarter of 2007 have been thwarted by recent strong reports - including the December jobs report and last week's December retail sales news.

Yet, questions still remain about the pace of economic growth and what it will mean for interest rates, for the inflation outlook and for earnings in the months ahead. As such, investors will continue to scour the economic reports for clues.

Next week's standouts include December producer and consumer prices, December housing starts and building permits and manufacturing in the Northeast. On Wednesday, the Fed releases the "beige book," its periodic survey of economic activity.

All financial markets are closed Monday in honor of the Martin Luther King Jr. Day.

Wholesale inflation above forecasts

Producer Price Index gain smaller than November spike, but overall and 'core' rates top forecasts.

January 17 2007: 10:17 AM EST


NEW YORK (CNNMoney.com) -- Wholesale prices rose in December but at a slower pace after November's spike, the government said Wednesday, but inflation pressures were still higher than investors had been expecting.

The Producer Price Index jumped 0.9 percent last month after soaring 2 percent in November, the Labor Department reported. Economists surveyed by Briefing.com had forecast a 0.5 percent rise.

The more closely watched core PPI, which strips out often volatile food and energy prices, edged up 0.2 percent after jumping 1.3 percent in November. Average forecasts were for a 0.1 percent rise.

Inflation protection for investments
The report comes a day ahead of the more important Consumer Price Index, which measures retail prices and is the government's key inflation gauge. Economists are forecasting a gain of 0.4 percent for December while the core CPI is seen up 0.2 percent. Both those measures showed no change in the November report.

Inflation is being closely watched by investors for clues as to when the Federal Reserve might feel comfortable cutting short-term interest rates.

The report showed a 2.5 percent rise in energy prices in December. That increase is probably less of a concern to economists and investors due to the recent sharp drop in oil prices so far this month. Oil prices hit a 20-month low in early trading Wednesday. And the rise in December was considerably less than the 6.1 percent rise in the November report.

"When we look at the huge reversal we've seen in energy prices recently, in the next release we're likely to see a negative number for the overall PPI" for January, said Jason Schenker, economist with Wachovia. "And the core PPI - that's not a scary number. Year over year it came in on target at a 2.0 percent rise."

Still, Schenker said the report is not good news for anyone hoping for a Fed rate cut in the first quarter of this year, or even in the first half.

"The year-over-year rise in the core is the highest number we've seen since September '05," he said. The Fed is generally believed to want to see core inflation measures rise between 1 and 2 percent on a year-over-year basis.

"That argues against a rate cut, but it's not a reason for the Fed to go out and start hiking rates," said Schenker, speaking about the 12-month change in the core PPI.

In its report, the department said food prices jumped 1.7 percent last month after rising only 0.1 percent in November. Fresh fruits and vegetable prices soared more than 20 percent. That was partly offset by a slight decrease in corn prices after big jumps for that commodity the previous two months.

The report left overall wholesale prices up 1.1 percent over the last 12 months. While that's a little above the 0.9 percent 12-month change seen in the November reading, it remains a relatively tame figure.