By Ryan Vlastelica
NEW YORK Jan 17 The initial reads on earnings
have been mixed, and yet U.S. stocks are hovering near all-time
highs. This week, investors will see whether the first companies
out of the gate were a harbinger of what's to come.
More than 60 S&P 500 companies are scheduled to release
results this week, including more than half a dozen Dow
components. The reports will give the fullest picture yet of how
corporations are faring and whether the market can advance
further as Fed stimulus begins to recede.
"Given that equities are fully valued and arguably
overvalued, we need earnings and revenue to come through to
support the gains we've already made," said Jack Ablin, chief
investment officer at BMO Private Bank in Chicago. "There's a
reasonable chance we could see a 10 percent correction in the
event we get some high-profile disappointments."
Earnings for S&P 500 companies are expected to rise 7
percent in the quarter, down from the 7.6 percent rate that had
been forecast at the start of the year.
While the season started with many financial companies,
including JPMorgan Chase & Co and Bank of America Corp
, topping profit expectations, Intel Corp
sounded a sour note, slumping on a weak revenue outlook. General
Electric Co shares sold off despite the conglomerate's
higher-than-expected revenue, suggesting blowout results may be
needed to justify elevated valuations.
With 10 percent of the S&P 500 having reported results so
far, 50 percent have topped earnings forecasts, well below the
historical average of 63 percent, according to Thomson Reuters
data. More than 67 percent have beaten revenue expectations,
above the long-term average of 61 percent.
Procter & Gamble Co, McDonald's Corp,
Microsoft Corp, Johnson & Johnson and Verizon
Communications Inc are among the Dow components scheduled
to report earnings this week. Texas Instruments Inc and
Starbucks Corp are also on tap.
The U.S. stock market will be closed on Monday for the
Martin Luther King Jr. holiday.
WATCHING FOR SIGNS OF BUSINESS SPENDING
BMO's Ablin said that results from more cyclical groups
would be especially important for insight into the strength of
the overall economy.
"The next leg of the cycle has to be driven by business
spending," he said. "I'm looking for clues that businesses are
taking their excess cash flow and spending it, which means tech
and industrial reports will be very important, especially any
outlooks they offer."
Another key name will be Netflix Inc, the S&P 500's
biggest gainer in 2013. The online movie renter's stock nearly
quadrupled last year, raising concerns it may follow the same
path as another of 2013's momentum favorites, Best Buy Co Inc
. On Thursday, the electronics retailer's stock suffered
its worst daily decline since 2002 after posting weak holiday
sales and giving a downbeat margin forecast.
Jonathan Krinsky, chief market technician at MKM Partners in
Greenwich, Connecticut, said the market was "absolutely
vulnerable to a pullback on big disappointments," though the S&P
500 might find support at its 50-day moving average, about 1.7
percent below Friday's close at 1,838.70.
"If we take that out, that would be the first time we've
made a lower low in a while," he said. "That could push us to
retest the December low around 1,770."
Last week, the Dow rose 0.1 percent, the S&P 500 slipped 0.2
percent and the Nasdaq climbed 0.6 percent. Both the Dow and S&P
500 are within striking distance of all-time highs.
For the year so far, the Dow is down 0.7 percent and the S&P
500 is down 0.5 percent, while the Nasdaq is up 0.5 percent.
The forward price-to-earnings ratio for the S&P 500 is about
15.22, according to Thomson Reuters data, roughly in line with
the historic average. While that suggests valuations are not
tremendously stretched, further steep gains may be difficult to
"We're much more likely to fall on negative earnings than we
are to rally on strong ones," said Bruce Bittles, chief
investment strategist at Robert W. Baird & Co in Nashville.
"There's much more downside risk than upside at these levels,
and that will probably be the case until we work off some of the
excess out there."
This week will be a light one for economic data, with
Thursday's read on December existing home sales perhaps the
biggest report. Sales are forecast to edge up for the month,
according to economists polled by Reuters.
(Wall St Week Ahead runs every Sunday. Questions or comments
can be emailed to: ryan.vlastelica(at)thomsonreuters.com)