Earnings reports may indicate whether stock rally will persist
An intense week of earnings reports will tell whether Wall Street can extend its rally to a seventh week -- or see its gains pop like a bubble.
With each week that the stock market lifts itself from the 12-year lows seen in early March, investors grow at turns hopeful and nervous. The gains are welcome after torrential selling in February, but too much too soon could fan worries that a rebound will quickly go into reverse.
The coming week’s flood of corporate earnings and important data on the housing market probably will bring the biggest test yet of whether traders have been correct in placing bets on a strengthening economy.
The Dow Jones industrial average will start the week up 24% from its March low. That’s an enormous jump that might ordinarily take the market years to assemble, so some traders are naturally skeptical.
Wall Street has allowed the gains because of tentative signs that the economy might be starting to right itself. Reports on home sales, manufacturing, retail sales and even unemployment have indicated that the economy isn’t sliding as quickly as it had been only months ago.
But that doesn’t mean investors can sound the all-clear.
“The economy is still shrinking. It’s just shrinking at a lesser rate,” said Keith Hembre, chief economist at the First American Funds in Minneapolis.
Traders will take what they can get after a punishing drop that earlier this year left stocks down by half from their peak in October 2007. There are still doubts because previous rallies fizzled, including a 20% jump from November to early January.
Like the latest run, the earlier pop came in a relative quiet stretch, before earnings reports began. But the traders and analysts who were burned in January by ugly fourth-quarter results appear more guarded. They’ve set expectations so low that most of the companies turning in results are beating Wall Street’s forecasts.
Of the 52 companies in the Standard & Poor’s 500 index that have so far issued reports on the first quarter, 32 have had numbers better than analysts expected, according to Thomson Reuters. A handful of the results were in line with expectations and 17 had reports that fell short of expectations.
The surprises have been fuel for the rally. The showing from banks in particular has helped ease some of investors’ worries about the economy. Citigroup Inc., JPMorgan Chase & Co., Goldman Sachs Group Inc. and Wells Fargo & Co. all had better-than-expected news in the last two weeks.
But with so many companies coming in ahead of analysts’ forecasts, there is a danger that traders could start to hit the “sell” button if they’re no longer impressed by companies that jump a low hurdle. And this week there will be far more companies reporting than in recent weeks, so trading could be choppier as investors look for clues about what a company’s results might signal for the economy.
Among the hundreds of firms expected to report are 3M Co., Bank of America Corp., Boeing Co., Coca-Cola Co., DuPont, IBM Corp., McDonald’s Corp., Merck & Co., Microsoft Corp. and United Technologies Corp., whose businesses include Otis elevators and Carrier air conditioners.
On Thursday and Friday, investors expect to get figures on sales of existing and new homes last month. A report is also due on demand for big-ticket manufactured goods.
The housing data could be a big force in shaping investors’ attitudes, analysts say. A housing recovery is crucial to helping consumers feel more confident and enabling banks to put aside some worries about eroding asset values.
“If you’re going to feel very positive about financials beyond the quarter, it does come down to whether you think the worst of housing is behind us,” said Bob Browne, chief investment officer at Northern Trust Global Investments in Chicago.
Browne is encouraged by the signs of stabilization, but he thinks the market still needs meatier data that give clearer indications of a healing economy.
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At a glance
TODAY
The Conference Board releases leading indicators for March.
Quarterly earnings reports due from Bank of America, Halliburton, Hasbro and IBM.
TUESDAY
Senate Finance Committee holds hearing on overhauling the healthcare system.
House Oversight and Government Reform subcommittee holds hearing on the Treasury Department’s plan for toxic assets.
House Judiciary subcommittee hearing scheduled on “A New Age for Newspapers: Diversity of Voices, Competition and the Internet.”
Quarterly earnings reports due from Advanced Micro Devices, Yahoo, Caterpillar, Delta Air Lines, Lockheed Martin and UAL.
WEDNESDAY
International Monetary Fund releases its world economic outlook.
Senate Commerce, Science and Transportation Committee hearing on overhauling the Federal Communications Commission.
House Ways and Means Committee hearing on changing the health insurance market.
Quarterly earnings reports due from Apple, EBay, Northrop Grumman, Qualcomm, Wells Fargo, WellPoint, AT&T;, Boeing, McDonald’s and Yum Brands.
THURSDAY
Labor Department releases weekly jobless claims.
National Assn. of Realtors releases existing-home sales for March.
Freddie Mac releases weekly mortgage rates.
House Education and Labor subcommittee hearing on reducing the cost of health insurance.
Quarterly earnings reports due from Amgen, McClatchy, Netflix, Occidental Petroleum, Alaska Air Group, Amazon.com, JetBlue Airways, Microsoft and US Airways Group.
FRIDAY
Commerce Department releases durable goods and new-home sales for March.
Quarterly earnings report
due from 3M, Honeywell International and Xerox.
SATURDAY
Spring meetings of the International Monetary Fund and the World Bank, through Sunday.
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