Wave of earnings data due to begin

L.A. Times Archives

Oct. 8, 2007 12 AM PT

From the Associated Press

new york -- Now that Wall Street is more upbeat about the economy after this summer’s upheaval in the financial markets, it’s looking for evidence that corporate America is thriving too.

This week brings the first wave of third-quarter corporate earnings reports. Investors are already bracing for dim results -- Standard & Poor’s Corp. anticipates a slight decline in total earnings per share for S&P; 500 companies. But S&P; is forecasting fourth-quarter growth of more than 10%, so the outlooks that companies issue will be crucial.

The third quarter was rough for the financial markets -- not that you’d be able to tell from where stocks stand now. Last week, the Dow Jones industrial average rose 1.2% and is near record highs. In the broader market, the S&P; 500 index hit a record after gaining 2% last week, while the Nasdaq composite index climbed 2.9%.

The gains came as data revealed a growing jobs market in August and September, amid modest growth in the manufacturing and services sectors. Investors shrugged off warnings from Citigroup Inc., UBS, Washington Mutual Inc. and Merrill Lynch & Co. that loan-related losses would significantly hurt their third-quarter results.

Wall Street, unsurprised by the announcements, was if anything relieved that the banks foresaw better performance for the fourth quarter.

But any worse-than-expected earnings or warnings revealing problems going forward could rock the market.

“The relief rally has gotten us to this point,” said Joe Battipaglia, chief investment officer at Ryan Beck & Co. “There continue to be lagging sectors, the biggest being, of course, the consumer.”

On Friday, the Commerce Department reports on September retail sales, which economists surveyed by Thomson Financial expect to show an anemic gain. But Wall Street is forecasting solid third-quarter earnings from some big consumer brands -- Yum Brands Inc. today, Costco Wholesale Corp. on Wednesday, and PepsiCo Inc. on Thursday.

Alcoa Inc. on Tuesday will be the first of the 30 Dow companies to release third-quarter earnings, and the aluminum producer is expected to report a modest rise in profit.

Another Dow component, General Electric Co., will release earnings Friday. GE is expected to post an increase in profit despite warning last month that exiting the struggling sub-prime lending market meant the industrial conglomerate had to take a third-quarter charge of $300 million to $400 million.

Some of the most highly anticipated earnings reports, given the problems in lending this summer, are those of student lender SLM Corp., or Sallie Mae, which is currently a takeover target, and M&T; Bank Corp., the first of the regional banks to officially release third-quarter results. Analysts expect both to post modest gains.

Although earnings are coming into focus, monetary policy remains on investors’ minds.

On Tuesday, the Fed will release minutes from its Sept. 18 meeting, when it decided to lower the target federal funds rate by half a percentage point to loosen up the credit markets and prevent them from paralyzing the economy.

Wall Street is split over whether policymakers will lower the target rate again at their next meeting or hold it at 4.75%. Battipaglia thinks they should keep rates where they are, given that the credit and stock markets are improving. Last week, demand for commercial paper -- a type of bond that companies sell for quick cash -- was on the upswing.

Furthermore, the stocks of energy and food companies have rebounded from their August sell-off, while the dollar is still trading near all-time lows against the euro -- a recipe for inflation.

A weak dollar helps boost U.S. exports and magnifies revenue at U.S. companies with overseas operations, but it can also make imports more expensive and U.S. Treasury bonds less attractive to foreign buyers.

Wall Street will see Thursday how the dollar is affecting trade in the Commerce Department data on the August international trade deficit and September export and import prices.

If the weaker dollar is a concern for the Fed, or if inflation appears to be accelerating in the Labor Department’s report Friday on September producer prices, lower rates may not be in store for the market.

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At a glance

Today

Columbus Day holiday. Government bond markets are closed, but most other U.S. financial markets are open.

Quarterly earnings report due from Yum Brands.

Tuesday

Treasury bill auction.

Quarterly earnings report due from Alcoa.

Wednesday

Quarterly earnings reports due from Levi Strauss, Costco Wholesale and Monsanto.

Thursday

Some of the nation’s largest retailers announce their sales figures for September.