By Kate Gibson
The U.S. stock market faces a massive onslaught of earnings in
the days ahead, after getting a major lift from surprisingly upbeat
results from a slew of big-name players, helping the major indexes
to a 7% gain last week.
While the market saw some profit-taking on Friday as it headed
into the weekend, the pendulum, which swung to the negative side in
late June, "has decisively swung back in mid-July," said Marc Pado,
U.S. market strategist, Miller Tabak.
Last week had financial powerhouse JP Morgan Chase & Co.
(JPM) and IBM Corp. (IBM) delivering large positive earnings
surprises. The stream of better-than-expected results also included
General Electric Co. (GE), Bank of America Corp. (BAC) and
Citigroup Inc. (C).
Others turning in like results including Baxter International
Inc. (BAX) and Marriott International Inc. (MAR)
U.S. stocks on Friday ended mixed, but the Dow Jones Industrial
Average (DJI) tallied a weekly gain of 7.3%, the S&P 500 Index
(SPX) scored a 7% rise from the prior Friday's close, while the
Nasdaq Composite (RIXF) added 7.4%.
Technical charts indicate the market is at the end of a big bear
market, according to Ed Yardeni, chief investment strategist at
Yardeni Research Inc.
Commodities gained along with equities, with crude-oil futures
rising more than 6% for the week to close above $63 a barrel. .
Treasury prices turned lower, pushing yields to their biggest
weekly jump in more than a month.
"Keep in mind that several of the financial institutions
reporting good earnings this week have enjoyed a nice uptick in
investment banking but do not have to deal with the negative
ramifications of mark-to-market accounting of derivative holdings
that wrecked havoc on financial earnings over the last couple of
years," said Fred Dickson, chief market strategist, Davidson
Cos.
"We believe that most of the positive market action relates to
investors and traders being surprised by the number and consistency
of positive earnings surprises coming from the big names that
reported [last] week," said Dickson.
"We still are very early in earnings reporting season and will
be anxious to see how second-tier companies with primarily domestic
business models fared during the quarter and what they see for the
next couple of months. We suspect that the news from these smaller
less visible companies may not have the luster" seen last week, he
added.
Another cautionary note came from Peter Boockvar, equity
strategist, Miller Tabak & Co., who said while companies are
topping earnings-per-share estimates, many are missing revenue
estimates.
"It's a tribute to corporate America's ability to keep a lid on
costs and improve margins but also highlights the tough economic
environment," Boockvar said.
More to come
The coming week brings another wave of quarterly reports,
starting off with slated releases on Monday from a broad array of
sectors, including industrial manufacturer Eaton Corp. (ETN),
toymaker Hasbro Inc. (HAS), and oil services giant Halliburton Co.
(HAL), among others.
Texas Instruments Inc. (TXN) and Zions Bancorp (ZION) both are
expected to report after the close.
Tuesday brings an avalanche of quarterly reports from companies
including DuPont (DD), Caterpillar Inc. (CAT) and Continental
Airlines Inc. (CAL). UnitedHealth Group Inc. (UNH) and Western
Union Co. (WU) are also on Tuesday's calendar, while technology
firms Apple Inc. (AAPL) and Advanced Micro Devices Inc. (AMD) are
poised to report after the closing bell.
Microsoft Corp. (MSFT), McDonald's Corp. (MCD) and American
Express (AXP) are among the stream of companies reporting later in
the week.
Last week's developments unrelated to earnings had eyeing CIT
Group Inc. (CIT), which ended talks with the government over a
financial lifeline to stave off what could prove to be the third
largest bankruptcy ever.
On Friday, CIT was reportedly in talks with JPMorgan Chase (JPM)
and Goldman Sachs Group Inc. (GS) on securing financing, with its
shares rallying as a result.
Pado for one argued the government's apparent refusal to come to
the small business lender's rescue could be viewed in a positive
light for the market.
"What this tells investors is that the Fed and Treasury now see
the U.S. economy as healthy enough to withstand a major failure.
The government has seen marked improvement across many sectors, and
its refusal to bailout CIT can be viewed as a perverse positive
vote of confidence in the U.S. economy," the analyst said.
"The economy appears fragile outside of the technology sector
and credit risks linger, especially given the stress on CIT," said
Nick Kalivas, an equity analyst at MF Global Research.
But Kalivas has a mixed take on the situation, saying bankruptcy
would not necessarily be a bad thing if the company continues to
function and provide liquidity. If not, "there could be a credit
crunch for many middle market companies," he said.
Capitol Hills
And, beyond wading through the mass of earnings reports slated
for release during the next three weeks, investors are trying to
decipher the potential impact of proposed health care and energy
legislation now working its way through Congress.
On Tuesday, Federal Reserve Chairman Ben Bernanke will head to
Capitol Hill to deliver his semiannual testimony to the House
Financial Services Committee.
"While there is no doubt Mr. Bernanke will be reserved in his
outlook, the Fed did just moderately upgrade their GDP forecasts
and one imagines Mr. Bernanke will spend some time explaining why
the Fed believes the economy will grow 2.1% to 3.3% in 2010 as
opposed to 2.0%-3.0%, said Dan Greenhaus, an analyst with Miller
Tabak's market strategy group.
"We expect Chairman Bernanke to present a more upbeat outlook on
activity and inflation," wrote Barclays Capital Research analyst
Dean Maki and colleagues in a research note.
Many analysts believe Bernanke's words will draw more market
attention than economic data, which starts on Monday with leading
economic indicators for June, followed by existing home sales and
weekly jobless claims on Thursday and an index of consumer
sentiment in July on Friday.