By Wallace Witkowski
The U.S. stock market's recent gains will be put to the test in
the coming week as investors digest a torrent of major earnings and
data, which may further mute hopes of economic recovery.
While second-quarter earnings are expected to increase at a
decent pace, the tone of company outlooks is more likely to provide
a telling direction for the market.
"Corporate guidance should be conservative in general because of
lack of visibility," said Sean Kraus, chief investment officer at
CitizensTrust. "There's going to have to be a re-tempering of
expectations. People really did think we'd have a robust
recovery."
Late Monday, aluminum producer Alcoa Inc. (AA) kicks off the
start to earnings season, followed later in the week by Intel Corp.
(INTC), Advanced Micro Devices Inc. (AMD), Google Inc. (GOOG), and
General Electric Co. (GE), along with a slew of banks including
J.P. Morgan & Chase (JPM), Citigroup Inc. (C), and Bank of
America Corp. (BAC).
Coming off the first quarter, investors had fairly high
expectations concerning the pace of economic recovery, Kraus said,
but they may have to settle for a 2% economic growth rather than
3%.
"In the short-term, this summer, we need to be fairly cautious,
and be very cautious this earnings season to take good news with a
grain of salt," Kraus said. "When you see bigger companies like
Intel reporting we're going to get a better view of what corporate
America is seeing."
Analysts polled by Thomson Reuters expect earnings for companies
in the S&P 500 index (SPX) to rise 27% compared to the same
quarter last year, with materials, energy and technology stocks
leading the charge.
Along with earnings, the week will see the release of data such
as U.S. retail sales, the international trade balance, inventories,
industrial production, the consumer price index, and consumer
sentiment.
U.S. stocks have rallied over the week shortened by Monday's
July 4 holiday, recouping much of the losses booked over the seven
prior losing sessions. Volume over the past week was light,
however, raising suspicions that gains could fall apart during
earnings season.
"Over the holiday weekend, the market caught its breath after
reports did not show signs of a double-dip recession," said
Channing Smith, co-manager of Capital Advisors Growth Fund.
"We'll see if this light-volume week was the calm before the
storm. Expect much more volume this week because of data. Next
week, the market is going to be bombarded with data."
Daily volume for stocks on the Dow Jones Industrial Average
(DJI) has ranged between 26 million to 30 million shares over the
past week, compared with an average volume of 79.3 million
shares.
Fireworks after the Fourth
On Friday, the Dow rose 0.6% to close at 10,198, for a 5.3% gain
on the week. The S&P 500 Index closed up 0.7% at 1078 for a
weekly gain of 5.4%, and the Nasdaq Composite Index (RIXF) advanced
1% to close at 2,196 for a gain of 5% for the week.
In an overly bearish and oversold market, Smith said any shred
of good news was able to spark a rally in the past week. On
Wednesday, bank stocks rallied when State Street Corp. (STT) issued
a second-quarter outlook that was well above analysts' estimates.
Next week, investors will have to be more selective. Smith said the
market can handle slower growth if outlooks over earnings season
are more cautious.
One of the underperforming sectors this earnings season may end
up being the financials sector, which has been buffeted by bank
reform legislation. This quarter's bank earnings may be muddied by
comparison with last year's accounting. Also, next week bank stocks
may come under pressure if the U.S. Senate votes on passage of the
Dodd-Frank bank reform bill.
"Banks are not going to have such good earnings because last
year they reversed mark-to-market losses," said Albert Meyer,
Portfolio Manager of the Mirzam Capital Appreciation Fund.
"Manufacturing, the rest of the sectors will report decent earnings
to counteract that."
Despite shaky consumer confidence, Meyer points to high CEO
confidence and economic indicators as presaging a good, but not
great, earnings season. "It'll be strange if numbers come out low
next week," he said.