By Wallace Witkowski, MarketWatch
SAN FRANCISCO (MarketWatch) -- Stocks are trading near record
highs, and some say that's more due to cautious optimism than solid
fundamentals.
Stocks finished higher last week , and the Dow Jones Industrial
Average (DJI) set its first record close of the year. The S&P
500 Index (SPX) passed into record close territory but couldn't
finish there. The Nasdaq Composite Index (RIXF) closed up 1.2% on
the week, though it's still down 1.3% for the year.
The workings of the Dow suggest hope is driving prices rather
than the bottom line. Sales and profit trends aren't looking so
hot, nor are corporate outlooks.
The 24 out of 30 blue-chip companies that have already reported
are showing a 3.3% decline in first-quarter earnings, setting up
the third year-over-year decline in earnings out of the past four
quarters, says FactSet data. Similarly, revenue is on track to rise
0.4% for the first quarter, which would be the seventh straight
quarter of sub-1% growth. Yet, over the past 12 months, the Dow is
up more than 11%.
"It does not appear that results for Q1 are fueling the rally,"
said John Butters, senior earnings analyst at FactSet, in a note.
"Perhaps the market is looking ahead at expectations for higher
earnings and revenue growth in the future."
S&P 500 companies are doing a little better than their Dow
counterparts on earnings. The blended earnings growth rate for the
first quarter is now 1.5%, up from the anticipated 0.4% decline at
the end of the first quarter but much lower than the expected 4.4%
growth rate at the beginning of the first quarter.
While outlooks have not been as negative as they have been
lately, it's too soon to tell if second-quarter growth is
accelerating, said Nicholas Colas, chief market strategist at
ConvergEx Group. Given the sluggish first quarter, expectations for
the second quarter are higher, he said.
"I'd characterize them as being more faith-based than
data-based," said Colas.
Analysts appear to less negative than usual. In a recent Goldman
Sachs report, the firm noted that second-quarter consensus
estimates have flattened out rather than declined as is customary
with the progression of earnings season.
Much of the optimism stems from the lousy winter and how it
affected big-ticket purchases. While not all of that will be
recovered in the following quarters, companies are predicting a
fair amount will, said Randy Frederick, managing director of
trading and derivatives at Charles Schwab.
"Probably half the things people didn't do was because of the
weather, so there's a lot of pent up demand," Frederick said.
Disney, Pfizer, Tesla
Only two Dow components report this week: Pfizer Inc. (PFE) on
Monday, and Walt Disney Co. (DIS) on Tuesday. Nearly 80 companies
in S&P 500 companies will report with much of the weighting in
media stocks and insurers.
Along with Disney this week, Twenty-First Century Fox Inc.
(NWS)(NWSA) and MarketWatch parent News Corp. (NWSA)(NWS) report.
Also reporting are CBS Corp.(CBS), Discovery Communications
Inc.(DISCA), Scripps Networks Interactive Inc.(SNI) , DirecTV(DTV)
, and Cablevision Systems Corp.(CVC)
Internet travel sites TripAdvisor Inc.(TRIP), Priceline Group
Inc.(PCLN) , and Orbitz Worldwide Inc. (OWW), and online deals site
Groupon Inc. (GRPN) also report.
Other consumer-focused stocks of note include Whole Foods Market
Inc. (WFM) , and Tesla Motors Inc. (TSLA)
Insurers also figure heavily with reports from American
International Group Inc.(AIG) , Allstate Corp.(ALL) , Prudential
Financial Group Inc.(PFG) , and Unum Group.(UNM)
Keep an eye on those late reporters
While earnings season hasn't been disastrous, one thing that
concerns ConvergEx's Colas is that companies that report later than
their sector peers can drag down sector performance.
"I tend to worry about mid-to-late earnings season because
sometimes those tend to be lower-quality companies, so I tend to
get a little bit cautious," Colas said.
So far, a large majority of companies in tech and consumer
staples have already reported results.
While Colas did not mention any specific companies, several
companies releasing results this week can be seen as late
reporters.
Companies in tech reporting late in the cycle this week include
Computer Sciences Corp.(CSC), Teradata Corp.(TDC) , First Solar
Inc.(FSLR) , Nvidia Corp.(NVDA) , Electronic Arts Inc.(EA) ,
Activision Blizzard Inc. (ATVI) , and Symantec Corp. (SYMC)
In consumer staples, late reporters include Molson Coors Brewing
Co.(TAP.NV.T) , Monster Beverage Corp.(MNST) , Sysco Corp.(SYY) ,
Tyson Foods Inc. (TSN) , Keurig Green Mountain Inc. (GMCR) , and
Mondelez International Inc. (MDLZ)
Yellen before Congress; Ira Sohn
Economic data will be light this week. Much of it came out last
week, which was packed with Federal Open Market Committee meeting,
ISM data, first-quarter GDP, and the April jobs report. That,
however, doesn't mean there won't be non-earnings catalysts.
Fed Chairwoman Janet Yellen will be speaking before Congress on
Wednesday and Thursday about the economy. Also the JOLTS, or Job
Openings and Labor Turnover Survey, will be released on Friday.
Yellen has been known to touch upon the JOLTS when addressing the
employment outlook so those numbers may provide some color on
April's jobs number and the FOMC statement, said Colas.
This week will also see longer-maturity Treasury auctions with
the 10-year Treasury(10_YEAR) this Wednesday and the 30-year
Treasury(30_YEAR) this Thursday. This past Friday, the 10-year
Treasury note hit its lowest yield since February.
Oil prices are also something to look out for with the approach
of summer driving season, especially with an emergency session of
the United Nations Security Council called on Friday over Ukraine.
Oil briefly topped $100 a barrel on Friday.
Developments in Ukraine themselves should do little to dent
markets in the long run, said Schwab's Frederick. MarketWatch's
Mark Hulbert supports that view in a recent column.
Also, the limelight will focus on other investing titans with
the close of Warren Buffett's Berkshire Hathaway shareholder
meeting. Then on Monday, hedge fund managers trot out their best
investment ideas at the annual Ira Sohn Investment Conference in
New York on Monday. There will be presentations Bill Ackman, David
Einhorn, Jeffrey Gundlach, among others.
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