Stocks Face First Peak Of Earnings Season

After taking its hardest weekly hit in four months, the U.S. stock market next week confronts third-quarter earnings in earnest, with 40% of the Dow components reporting.

“Earnings will dominate next week’s news flow. More importantly, we get management’s color on how the balance of the year looks,” said Lawrence Creatura, portfolio manager at Federated Investors Inc.

Mark Luschini, chief investment strategist at Janney Montgomery Scott, agreed: “People will be teasing everything there, it’s really not so much the numbers but what is said accompanying the numbers, what CEOs have to say about hiring, and the notion of the fiscal cliff blunting activity.”

The week brings the first “peak week” of the season, with results expected from 12 of the Dow Jones Industrial Average’s 30 components, and from 79 of S&P 500 companies, according to John Butters, a senior earnings analyst at data provider FactSet Inc.

Of the 34 S&P 500 companies that have reported third-quarter results so far, nearly 59% beat earnings estimates; almost 18% reported earnings in line with expectations and close to 24% came in below expectations, according to Thomson Reuters.

“This has been the ease-in,” Bill Stone, chief investment strategist at PNC Asset Management Group, said of the quarterly earnings reported so far. Next week “is just a ton,” said Stone, pointing to expected earnings from technology bellwethers International Business Machines Corp. and Intel Corp. , along with health-care products company Johnson & Johnson Tuesday.

Stall time

U.S. stocks last week took their hardest hit in four months on a pullback that many market observers chalked up to a much-needed pause after the market’s four-month climb into October.

The Dow finished with a 2.1% weekly loss, leaving it up 9.1% for the year. The S&P 500 fell 2.2% for the week, trimming its year-to-date advance to just under 14%, and the Nasdaq Composite tallied a 2.9% weekly loss, cutting its 2012 climb to nearly 17%.

“Having a slight pause is probably normal considering the strong run we’ve had in the face of decelerating statistics, both from the macroeconomic perspective, and with respect to company pre-announcements,” said Creatura at Federated.

“Basically the news hadn’t been good, but the market went up regardless. This week, we gave a little of it back. Ironically, it was in the face of some quite positive data, conspicuously positive data on the employment front,” Creatura added about the jobless rate falling to 7.8% in September.

While there are multiple factors behind the market’s rise, including a much-needed stabilization in the housing sector, analysts usually point to global monetary easing as a primary reason.

“The easiest first choice is to look at the central-bankers-gone-wild type behavior we’ve seen from Europe, the Bank of Japan and our own Federal Reserve. It’s a global shell game, the collective issuing of debt on the one and with other hand purchasing it with currency we’re also printing,” said Creatura.

U.S. economic reports in the coming week include U.S. retail sales on Monday and the Consumer Price Index Tuesday along with housing and manufacturing data.

“If we get reports showing stability if not improvement, it would give the market the economic validation to move higher,” said Luschini at Janney Montgomery Scott.

The market will also look to import and export data from China, which could hit during the weekend, and will be viewed to “give us a little idea of the strength or lack thereof of the Chinese economy and of the globe, to see how many are taking their goods,” said Stone.

The market is also holding its collective breath to see if and when Spain requests a financial rescue, a condition for the European Central Bank to purchase its debt and help lower the borrowing costs of the debt-strapped nation.

The Nov. 6 U.S. presidential election is also weighing on the market, especially given that it’s seen as a close contest.

“Right now with an evenly divided electorate, all the market sees is uncertainty, and uncertainty is priced at a discount,” said Creatura.

Marketwatch