Wall Street will be looking to firms’ earnings, outlooks
As hundreds of fourth-quarter earnings reports stream in this week, Wall Street’s reaction will turn on companies’ answers to one question: When will the recession end?
“Not soon” is what the market heard last week. Big banks posted ugly numbers and told investors they were still struggling with rickety balance sheets. That revived fears that the economic recovery that some analysts have forecast for the second half of the year won’t materialize.
The market has largely written off the first half of 2009. Now, stocks could take a beating if companies lead investors to believe that a recovery will be pushed back to 2010.
Of the 42 companies in the Standard & Poor’s 500 index that have reported results for the October-December quarter, 25 have fallen short of Wall Street’s already reduced forecasts, according to S&P.;
But some analysts believe that investors, who buy and sell based on how they think the economy will be faring six to nine months from now, will eventually stop reacting negatively to disappointing data.
“There will be more bad economic news,” said John Dorfman, chairman of Thunderstorm Capital. “I don’t think we’re out of the woods on layoffs and earnings announcements, but at some point it’s all factored in.”
He said the 50% drop in the S&P; 500 index to an 11-year low Nov. 20 from its October 2007 high gave him hope the market would start to look past bad news and find early signs that the economy was stabilizing.
“The sentiment is now so gloomy,” he said. “It’s the natural turning of the economic cycle. It’s mysterious when it’s going down. You think, ‘How can it ever turn?’ But it always does.”
This week, the industries issuing reports and 2009 outlooks are a diverse group, including technology companies, airlines and regional banks. Google Inc., United Airlines parent UAL Corp. and US Bancorp are among those expected to release results. Big names including General Electric Co., Microsoft Corp. and Johnson & Johnson are also due; more important, so are their comments about the state of their businesses.
It’s a shortened week with U.S. markets closed today for Martin Luther King Day. And Tuesday, some of investors’ attention will be diverted to Washington with the inauguration of President-elect Barack Obama.
The new administration could give stocks a bounce, market watchers say, as Obama prepares to dispense the second half of the government’s $700-billion financial bailout fund and awaits passage of an $825-billion stimulus package that is fast making its way through Congress.
“I think the inauguration will give people a little more confidence,” said Harry Clark, president and chief executive of Clark Capital Management in Philadelphia.
Wall Street last week saw a continuation of the selling that began Jan. 5, a pullback fed by investors’ renewed realization that the economy and corporate profits remain very weak. Despite an uptick Thursday and Friday, the S&P; 500 index lost 4.5% over the week.
Investors could get a break this week from the drubbing because major financial companies such as Citigroup Inc. and Bank of America Corp. have already delivered the bad news. Citigroup on Friday said that it lost $8.3 billion in the fourth quarter -- its fifth straight deficit -- and that it was splitting the company in two to help restore profit.
And investors will look at overseas markets, which are open today. The British government said Sunday that it was pumping more money into its banking system to try to revive lending.
Clark thinks that the news will continue to be grim but that a recovery will come sooner than most investors expect because the economy is 13 months into a recession. Even the toughest recessions usually don’t last longer than 16 months.
Clark cautioned that there was still risk of a shock such as the failure of another big financial firm, like the fall of Lehman Bros. Holdings Inc. in September. That could upend the relative orderliness seen in trading since late November.
But he also said earnings reports could offer a reminder that not all industries were suffering as much as banks and that a recovery was possible. Industries such as healthcare and consumer staples are holding up well compared with banks.
With little in the way of economic data due during the week -- a government report on housing construction is due Thursday -- investors will focus on earnings.
“There will be some good nuggets,” Clark said, referring to earnings reports. “The market needs a catalyst.”
“We’re in the bottoming process,” he said, predicting the gyrations in stocks would continue as investors examined the economy.
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At a glance
TODAY
U.S. markets closed for Martin Luther King Day.
The 2009 Automotive News World Congress gets underway in Detroit, through Thursday.
TUESDAY
Barack Obama inauguration.
Quarterly earnings expected from Bank of America, CSX, IBM, Johnson & Johnson, Lee Enterprises and TD Ameritrade Holding.
WEDNESDAY
Senate Homeland Security and Governmental Affairs Committee holds hearing on the financial crisis.
Senate Finance Committee holds hearing on the nomination of Timothy Geithner to be Treasury secretary.
Quarterly earnings expected from Abbott Laboratories, AMR, Apple, Burlington Northern Santa Fe, EBay, U.S. Bancorp, UAL and United Technologies.
THURSDAY
Commerce Department releases a report on housing starts for December.
Labor Department releases a report on weekly jobless benefit claims.
Mortgage company Freddie Mac releases weekly mortgage rates.
Quarterly earnings expected from Advanced Micro Devices, Bank of New York Mellon, Baxter International, Capital One Financial, Google, Lockheed Martin, Microsoft, Southwest Airlines, Union Pacific and UnitedHealth Group.
FRIDAY
Quarterly earnings expected from General Electric, Harley-Davidson, Schlumberger and Xerox.
