Earnings bellwethers aren't what they used to be

It's getting more difficult to be a true earnings-season bellwether company. Not long ago, investors looked to early-in-the-season reports from Alcoa and Intel to get a fix on what was next for the market. Alcoa was seen as a bellwether of industrial demand, while sales of Intel's chips were the canary in the coal mine that let investors handicap how computers and software were selling.

But the economy, and new technology, demand a reevaluation—and replacement—of traditional earnings bellwethers.

With a less-than-optimal position in the chip market for wireless devices, Intel isn't the signal it used to be. Or what it signals—the long-term decline of the PC—isn't news. Alcoa's position has been weakened by waning demand for many of its traditional products. So what is an investor to do, especially in an economy still lurching into occasional bouts of weakness years after the financial crisis?

Here are some ideas culled from market experts who paid attention to changes in technology as well as the specific strengths and weaknesses of this economic recovery. By taking a look at the four types of companies—and four market trends—detailed below, an investor can get a pretty good handle on the strength of the stock market.

1. The investment bellwethers

The market ultimately depends on the economy, and economic growth still works on the formula that gross domestic product equals consumer spending plus government spending, net trade balances and private investment. And in this recovery, the weak spot has been investment, both in housing and in the technology and intellectual property that fuel the next stages of growth.

Housing construction and remodeling, for example, is still about 1.2 million jobs shy of its prerecession peak. According to Moody's Analytics, a bounce from current levels of about 600,000 annual single-family housing starts to 900,000 would add about 1 million jobs, with starts still lower than in any prefinancial crisis year since 1991. A home-building surge would also significantly raise the odds that the Federal Reserve would raise interest rates more aggressively and signal a move in consumer confidence more tangibly than any survey.

That means investors should watch companies like PulteGroup, D.R. Horton and Lennar. Because their homes are built to order, they are a clear sign of where revenue will be in three to six months.

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To track business investment is, on one level, to find a surrogate for the role Intel used to play. On the business-to-business side of tech, the closest parallel now is probably to watch consulting firms like Accenture or the consulting division at IBM. Investment in computers and software used to grow at double-digit rates and now struggles to stay level. Investors can learn about that in each quarter's gross domestic product report.

During this season, expected earnings for both housing and those driven by business investment are soft. Pulte is expected to boost earnings per share by a penny from last year, to 20 cents, as revenues rise about 10 percent. Expectations for IBM and Accenture are also soft: IBM is expected to boost EPS but see revenue decline, while analysts think Accenture will see profits drop about 2 percent to $1.23 a share. If the consultants beat expectations, that would be a bullish sign for the economy and the market. Most home-building stocks beat first-quarter 2014 expectations, but that didn't produce a housing rally, as orders were soft due to the polar vortex.

2. The credit bellwethers

Modern economies run on credit and seize up, as in 2008, when it's not available. But since 2010 or so, the bigger problem has been weak loan demand—even when banks want to lend, wary consumers and businesses often don't play along.

Perhaps the single best bank to watch during earnings season is Wells Fargo, which, like its rival Bank of America, is a Main Street lender to small- and mid-market businesses and consumers. Unlike Bank of America, Wells doesn't own a giant investment bank like Merrill Lynch.

In particular, watch for Wells' loan growth as well as its top- and bottom-line performance. It's also worth paying attention to high-quality regional banks that broadly mirror Wells' approach, from U.S. Bancorp (Warren Buffett is a major investor in Wells and USB) to PNC Financial. Wells Fargo is the first of these banks to report each quarter.

Wells Fargo reported on April 14 that its profit dipped $100 million, to $5.8 billion, modestly beating expectations, but it was the first time that profits declined at the bank in more than four years (18 quarters, to be exact). Loan balances were a positive amid a mixed earnings report, climbing by 1.6 percent from the fourth quarter and 7 percent from last year.

Investors can match that up with macro data, like the Federal Reserve's quarterly loan officers survey, which showed modest improvement in loan demand in January, or the monthly G-19 report on consumer credit, which shows consumers loosening the reins slightly on credit card borrowing. Taken together, they are bullish loan indicators.

3. The Main Street America bellwethers

Companies that reflect middle-income mom-and-pop consumers are key reads, especially in a post-crisis economic rebound period.

Consumer spending is still 70 percent of the U.S. economy, growing at a brisk 3.4 percent annual rate in the last nine months of 2015. And the median household makes just above $51,000 a year. Together that makes a big macro bellwether of Wal-Mart Stores, whose recent struggles have mirrored the slow pace of the consumer recovery for much of the post-2008 era.

The parallels aren't exact—as consumer spending picked up in mid-2014, Wal-Mart continued to struggle, with full-year profits from continuing operations virtually unchanged at $1.61 a share. But Wal-Mart is the biggest retailer in the world by far and gives a cleaner look at the consumer than many others. Target is riven by internal problems, while Amazon.com is in too many other businesses and is still taking so many customers from offline merchants that its growth doesn't reflect the economy or the market. This quarter Wal-Mart's expected to earn $1.05 a share, down a nickel from this time last year.

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More than any time in recent memory, Wall Street's fortunes are likely to reflect Main Street's. Big banks are still too mired in capital-building and new regulation to be market leaders, and global commodity prices make this quarter's big expected drop in oil profits a foregone conclusion (in short order, it should also turn up as increased discretionary consumer spending).

The results at the big Main Street stocks, from Wal-Mart to Wells Fargo, are also likely to reflect the economic data that will tell the Federal Reserve when the economy is healthy enough to begin raising interest rates.

4. The big-cap tech bellwethers

For investors, the action in technology has long since shifted toward consumer technologies like smartphones more than corporate software (think Oracle or Cisco Systems). That means you have to watch big-cap consumer tech companies like Apple, Facebook and Google, who all report between April 22 and 27 this quarter.

Their earnings will tell you about the market for both smartphone devices and the advertising dollars that are making them the new media of the new millennium, as well as the prospects for the many app developers and suppliers who sell into these emerging markets.

Expectations for Google are a 6 percent earnings gain as sales rise 14 percent, reflecting the fact that the company is in investment mode. Analysts think Facebook's per-share earnings will rise 18 percent on a 42 percent revenue jump that reflects the company's surge in mobile and the continuing shift of ad dollars to online media. Apple sales are expected to rise 22 percent and earnings expected to gain 29 percent.

These are all niche companies, despite their size, but a good iPhone launch alone can measurably boost U.S. gross domestic product for the quarter when it happens.