By Chuck Mikolajczak and Caroline Valetkevitch
NEW YORK, April 15 After suffering their worst
two weeks of the year, stocks will look to quarterly earnings to
determine whether the recent pullback has been exhausted or more
losses are justified.
Alcoa Inc opened the earnings season with a bang,
reporting a first-quarter profit on Tuesday instead of the
expected loss. That positive surprise foretold a trend. Of the
32 companies in the S&P 500 that have reported earnings so far,
Thomson Reuters data showed that 75 percent - or two dozen -
have beaten Wall Street's expectations.
This week will start one of the busiest weeks of the
quarterly earnings reporting period. About 86 companies in the
Standard & Poor's 500 are expected to post results, according to
Thomson Reuters Director's Report.
At Friday's close, both the Dow Jones industrial average
and the S&P 500 suffered their worst two-week
percentage drops since late November. The Dow and the S&P each
fell 2.7 percent for the two weeks from the close on March 30.
"It seems like everybody's been waiting for this so-called
correction to potentially get back into the stock market," said
Kei Sasaki, managing director of listed equities at PineBridge
Investments in New York, which has $67 billion in assets under
Wall Street typically defines a correction as a drop of 10
percent from a recent peak. The S&P 500 is down 3.4 percent from
April 2 when it closed at its highest level since mid-May 2008.
"The correlations on a moving average have also stayed
relatively subdued, which tells us that investors are still
looking at the market in a fundamental way that they haven't for
the past year," Sasaki added. "So if earnings come in positive
for the first quarter, we think they will get rewarded for it."
Among the marquee names on this week's earnings calendar are
10 Dow components: Intel Corp, Johnson & Johnson
, Coca-Cola Co, DuPont, Microsoft,
The Travelers Companies Inc, Verizon Communications Inc
, American Express Co, General Electric Co,
and McDonald's Corp.
Financials will also be eyed this week on the heels of
Friday's results from JPMorgan Chase & Co and Wells
Fargo & Co. Both big banks' earnings exceeded forecasts.
In the coming week, earnings are expected from the likes of
Citigroup Inc, Goldman Sachs and Morgan Stanley
RIDING THE EURO-ZONE ROLLER COASTER
But even with earnings attracting investors' attention,
equities remain vulnerable to flare-ups in the euro zone as the
bloc continues to grapple with its debt crisis.
"Earnings are beating expectations. Outlooks still look
pretty optimistic," said Jack Ablin, chief investment officer of
Harris Private Bank in Chicago.
"Overall pretty good news, but it takes one lousy headline
out of Europe to trump the whole thing."
Equities snapped a two-day advance on Friday, pulled lower
as the rising cost of insuring Spanish debt against default
increased concerns about Europe's financial health.
Last week, the benchmark S&P 500 had gained for two
consecutive days after a drop of more than 4 percent in the
previous five sessions. That opened the possibility that
equities had seen the pullback many analysts were expecting
after the S&P 500 climbed 12 percent in the first quarter.
The S&P 500 remained near its 50-day moving average, a key
technical level that could help indicate the next direction for
"Technically, we were due for a correction, we started that
correction, and the market will always come up with reasons and
find excuses that fundamentally will trigger what should happen
technically - and it's happened almost perfectly," said Paul
Mendelsohn, chief investment strategist of Windham Financial
Services in Charlotte, Vermont.
"How far backwards we are going to fall remains to be seen -
we've got support at that 1,358 area, and we are playing around
the 50-day moving average area."
The S&P 500 closed on Friday at 1,370.26. For the day, it
was off 1.3 percent. For the week, it was off 2 percent.
Despite the recent declines, the S&P 500 is still up 9
percent for the year.
CHECKING THE ECONOMY'S VITAL SIGNS
The data will also get plenty of scrutiny this week for
signals on the U.S. economy's health after a
weaker-than-expected jobs report cast doubt on the recovery's
Economic indicators due this week include the Empire State
and Philadelphia Federal Reserve's manufacturing surveys, retail
sales for March, housing starts and existing home sales.
"It will be interesting to see if this is the beginning of
a soft patch, if this unemployment number is a harbinger of
more," said Stephen Massocca, managing director of Wedbush
Morgan in San Francisco.
The March nonfarm payrolls report, which was released on
Good Friday when the cash U.S. stock market was closed, showed
just 120,000 jobs added last month. That figure fell far short
of the forecast for 203,000 new jobs and raised questions about
whether the recovery in the U.S. labor market was stalling.
Sasaki of PineBridge Investments pointed out that
"employment's been under everybody's watch" since Good Friday.
"We still continue to see improvement. We believe it was a
hiccup but in aggregate, we think the economic recovery is still
continuing to improve."
But even if earnings are solid and data shows improvement,
markets could be susceptible to further losses if more signs of
fiscal distress in the euro zone emerge.
"You have to put Europe, Spain and Italy, on any 'watch
list' at this point. That may even be more important than
earnings," Massocca said.
"It's not really a liquidity issue. It's a solvency issue,
and there are a lot of political whirlwinds around that, and
there are a lot of concerns that the political will to actually
do something is not going to be. We shall see."
(Wall St Week Ahead runs every Sunday. Questions or comments
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