It's make-or-break time for the first-quarter earnings season, and
it comes just as the stock market is showing signs of strain.About 170 S&P 500 and 10 Dow companies report earnings in the week ahead, and they include everything from tech icon Apple to industrial names like Caterpillar and energy companies like giant Exxon.
As of Friday, a fifth of the S&P 500 had reported, and two-thirds
had better-than-expected earnings. But an unusually high amount—57
percent—missed their top-line revenue estimates, according to Thomson
Reuters.
That's a cause for concern, since stocks traded in
one of the most volatile seesaw patterns of the year in the past week,
as worries about global growth increased amid a dramatic sell-off in
commodities. The Dow finished its worst week this year 2.1 percent lower
at 14,547, and the S&P 500 was down 2.1 percent at 1,555. The
Nasdaq was down 2.7 percent for the week, even with Friday's big gain of
1.3 percent on the back of a tech rally.
The week ahead
also has a light but important economic calendar, including home sales
data Monday and Tuesday, durable goods Wednesday, and the first look at
first-quarter GDP Friday. Even though it is a reading of past activity,
first-quarter GDP is important since, at estimated 3 percent growth, the
rate is about double what is expected for the current quarter. Traders
have also been fixated on events surrounding the Boston Marathon
bombers, though it was not seen as a market factor.
"I
think this rally is a little weary," said Art Cashin, director of floor
operations at UBS. "The 'buy the dips' have been in and they bought most
of the dips. The question is will they continue, or is the market
getting ready for the spring swoon everyone is talking about."
Cashin said the Dow broke an important trend line at 14,500 Friday as IBM
had its worst day in eight years, but it rose back above that level by
the end of the day. The S&P struggled at its 50-day moving average
Thursday, but it too got about a dozen points above it by Friday
afternoon. Commodities markets were calmer by the end of the week, but
gold lost 7 percent in the past week, sliver lost 12.8 percent, copper
lost 6 percent and oil lost 3.6 percent.
"By any sort of measure, we're kind of overdue for some sort of a
pullback, and maybe we're finally going to get it," said Bill Stone,
chief investment strategist at PNC Wealth Management. Year to date, the
S&P is up 9 percent and has not had a significant pullback. He noted
that the economic data has been disappointing.
"Once you
had a market that moved up like this one has, expectations are really
your enemy. We're not meeting expectations … then you throw in earnings
season. Earnings, I would argue, are coming in better than expected.
Underneath the surface is something that's not quite so healthy," he
said. "They're struggling on the top line, the revenue side. That's
indicative of a global economy growing below trend." The
commodities sell-off is also signaling a global weakening, and it
accelerated when China released disappointing GDP data Monday.
Gina Martin Adams, institutional equity strategist at Wells Fargo
Securities, has also been expecting a pullback. "I still think we're in
some sort of process of trading a top. It's hard for me to say," she
said. "There has been enough disturbance to suggest the trend is now in
question, which is the first time you can say that this year. Certainly
the factors have been lining up."
"Every April we have this.
It's scary how the market is trending exactly as it has for the last
four years running," she said. "There is this confluence of factors. The
fundamental case—everyone was excited about the economy improving, but
that story broke down. The earnings are not improving. The commodities
complex looks just like last year."
Even though economists
expect a weaker economy, they do not expect it to be as soft as last
year, and stock strategists also expect the market to rebound later in
the year, after any sell-off.
Adams said seasonally, April
can actually be a good month for stocks so they may hold on, but in the
next few weeks, there could be a downdraft as there was in the past
three years. "May is when you get a little worried … we've got a
sideways trend in place," she said, adding it's also possible there
could be a sideways correction. That means stocks would grind in within a
range, instead of selling off.
This makes the earnings
season particularly key, as traders look for clues about the extent of
the soft spot and its impact on corporate profits.
"The next two
weeks are really important. That's when the bulk of the market cap
reports. They will be extremely important. There's a limited amount of
economic data to consume. The huge reports come at the beginning of the
month," when April employment data is released, Adams said.
She
added that is especially watching industrials and technology. "Those
are the areas where the market is expecting the greatest weakness. If
there are areas where there could be a surprise and guide higher, those
could be the areas. They should be the areas where the turnaround story
could occur, should it show up. I'd like to see that, but it's not in my
forecast."
Industrial companies GE and Honeywell
both reported earnings that slightly beat expectations Friday. GE,
however, reduced its forward guidance while Honeywell slightly raised
it. In tech, the message has been mixed. IBM fell 8 percent Friday after
its weak earnings report, but shares of Google and
Microsoft both gained even though revenues missed slightly.
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