Earnings Reports May Spark Stock Rally
A record number of earnings warnings has cleared the way for stocks to gain this week as investors look past the bad news toward sunnier days ahead.
This week will be the busiest period for first-quarter earnings reports with about 1,000 companies reporting, according to market research firm First Call/Thomson Financial. The professionals will be poring over these reports for signs of improving profit growth in the near future.
In recent weeks, stocks have sunk, some to lows unseen in years, as companies have said the slumping U.S. economy and a precipitous drop in sales have pounded their bottom lines.
At first, investors heeded such warnings and fled equities. By now, though, many share prices already reflect the slowdown and buyers are beginning to swoop in.
“I think there’s a good chance for a rally, given what’s gone on over the past few months,” said Bill Rubin, who helps manage $250 million in hedge funds for Keefe Managers Inc. “The ones that have been knocked down to the point that people threw in the towel, like tech, networking stocks, banks and broker dealers” could gain the most, he said.
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Bellwethers scheduled to report include computer-chip maker Intel Corp. on Tuesday and computer maker IBM Corp. and media giant AOL Time Warner Inc. on Wednesday.
It’s also the busiest week for banks, with earnings announcements expected by Bank of America Corp. and Citigroup Inc. on Monday, among others.
More than half the companies in the Dow Jones industrial average will announce earnings this week, and about 200 companies in the Standard & Poor’s 500 index will report, according to First Call.
Two-thirds of the announcements regarding first-quarter results have been negative, a record in the five years that First Call has tracked such data. This has prompted investors to flee shares, sending the Nasdaq composite index nearly 21% lower for the year.
But analysts expect earnings growth to zip up to a year-over-year average of 11.9% in the fourth quarter, helping to offset the average 8.7% decline expected in the first quarter. This could help investors overlook last quarter’s disappointing results, money managers said.
Meanwhile, the looming threat of recession will have investors watching data on housing starts and consumer prices Tuesday for clues on how quickly the economy is slowing and for an indication of how aggressive the Federal Reserve will be in cutting interest rates again.
Other economic data due out include a Fed report on March industrial production on Tuesday and the Conference Board’s March index of leading economic indicators Wednesday.
