1Q earnings pour in next week and the prognosis is good. But that doesn't mean a rally will follow.
April 10, 2004: 1:12 PM EDT
By Alexandra Twin, CNN/Money Staff Writer
NEW YORK (CNN/Money) - Strong earnings, strong stock market rally, right? Maybe. But maybe not.
It's the big question stock investors will be facing next week when the first big wave of S&P 500 earnings arrives, following this week's small splash.
Among the top-tier names releasing results in the coming week, Intel (INTC: Research, Estimates) reports Tuesday, Bank of America (BAC: Research, Estimates) reports Wednesday, Citigroup (C: Research, Estimates) reports Thursday as does IBM (IBM: Research, Estimates). (For a detailed look at these and other key earnings expected next week, click here.)
These reports are expected to be very bullish. Analysts surveyed by First Call expect overall first-quarter results to rise 17 percent from a year earlier, the best first quarter since 2000. However, in the last four quarters, actual results have tended to surpass estimates by at least 3 percent, according to First Call, meaning actual results this quarter could be up at least 20 percent year-over-year.
"The big question is whether the earnings growth is already built into the market, or can it help us move higher," said Paul Mendelsohn, chief investment strategist at Windham Financial Services. "It's very hard to answer that. Earnings should be the big driver of the market right now, but you seem to have this cross-current of events that are challenging that."
That was certainly the case this week, which started with a bang and ended with a whimper, as investors bid up stocks on anticipation about the earnings, but then couldn't sustain those gains through the week's end.
The earnings period got off to a slow start, with a per-share miss from Dow component Alcoa (AA: Research, Estimates) and warnings from Nokia (NOK: Research, Estimates) and Seagate Technologies (STX: Research, Estimates). But solid results from Yahoo! (YHOO: Research, Estimates), Genentech (DNA: Research, Estimates) and General Electric (GE: Research, Estimates), as well as an improved forecast from Dell (DELL: Research, Estimates) helped those particular stocks but failed to spark a broader market rally.
Analysts blamed this on a variety of concerns, some finite, some indefinite. Among the hindrances: the decline in volume ahead of the three-day Easter weekend, the S&P's continued inability to get through key technical levels, high energy prices, a mostly weaker dollar, the ongoing violence in Iraq and questions about the U.S. presidential election.
But all of this coincides with a period of time when many supportive factors are in place. In addition to the expected growth in earnings, the economic recovery is starting to pick up, interest rates remain at more than 40-year lows, and the impact of the Bush Administration's tax cuts continues to be felt. Even the battered labor market is starting to show signs of a rebound. Employers added more than 300,000 jobs to their payrolls last month and the latest Challenger, Gray & Christmas survey showed that employers also announced 26 percent fewer job cuts in the first quarter than they did in the first-quarter of 2003.
"There's optimism about earnings, the fundamentals continue to look good and hiring seems to be picking up," said Donald Selkin, director of research at Joseph Stevens. "The geopolitical situation is the only thing I can see that could be a real negative. Depending on what happens in Iraq, Bush's credibility could be in question."
Although studies show that stocks do better under Democratic administrations than Republican ones, the perception remains that Republican policies are more market friendly, the two analysts said.
There are a number of economic reports due in the week ahead, particularly in the second half of the week. But really, it's all about the earnings.
Strong earnings from bellwethers Intel and IBM are particularly important this week as they tend to move the market, Mendelsohn said. Overall technology earnings momentum is important, he said, because technology led the rally of 2003 and early 2004.
"Tech and financials you need strong earnings from to provide an underlying foundation for the market to push off of," he added. "Then retail and all the other sector earnings, those are the gravy."
Key events in the week ahead
Tuesday brings the March retail sales report, expected to have risen 0.7 percent after rising the same amount last month, according to a consensus of economists surveyed by Briefing.com. Excluding autos, retail sales are expected to have risen 0.6 percent in March. Retail sales ex-autos were unchanged in February.
Wednesday brings the March consumer prices inflation report from the Labor Department. CPI is expected to have risen 0.3 percent, after rising 0.3 percent in February. Excluding food and energy prices, the core CPI is expected to have risen 0.2 percent after rising 0.2 percent in March.
Thursday brings a pair of regional manufacturing reports. The NY Empire State index for April is due before the bell, and economists surveyed by Briefing.com expect it to have risen to 28.5 from 25.3 in March. The Philadelphia Fed index, due at noon, is thought to have risen to 26 from 24.2 last month.
Before the start of trading Friday, the March reads on housing starts and building permits are due. Housing starts probably rose to an annual rate of 1.9 million units from a 1.855 million unit annual rate in February. Building permits are expected to have dipped to a 1.905 million unit annual rate in March, from a 1.909 million unit rate in February.
The first read on April consumer sentiment from the University of Michigan is due Friday just after the open. Economists surveyed by Briefing.com expect it to have risen to 97.0 from 95.8 in March.
O Clubeinvest.com informa que nenhuma da informação
aqui facultada deverá ser entendida como conselho ou recomendação
de qualquer tipo de transacção ou investimento.
