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CNBC ON DIGG

Wall Street Analysts Are Way Wrong, But is the Stock Market Right?

Published: Tuesday, 21 Jul 2009 | 10:07 PM ET

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By: Patti Domm
Executive Editor

Another wave of much better-than-expected corporate results Tuesday shows that Wall Street's analysts have badly miscalculated earnings this quarter.

The question though is whether the stock market has it right.

For a seventh day, the Dow climbed higher Tuesday on the back of positive earnings news, even as Fed Chairman Ben Bernanke painted a cautious outlook for the still wobbling economy during a Congressional hearing. The Dow rose 67 to 8915, while the Nasdaq was up 3 to 954, and Nasdaq rose 6 to 1916.

Caterpillar, Dupont, United Health, Merck, Schering, United Technology, BlackRock, Coca-Cola, Lockheed Martin and Southwest Air all topped analysts' estimates during the morning, while Apple, Yahoo, and Starbucks all beat estimates in reports after the closing bell. (See More Below Stock Quote Box)

Tuesday's Blue-Chip Earnings

Even as these companies showed stronger than anticipated earnings results, revenues of many slumped and missed targets. Cost cutting has helped boost many a bottom line this quarter.

"I just don't see where in this environment the profits are coming from," said Steve Grasso, of Stuart Frankel. "I think we still have room on the upside but how long it lasts is the problem."

Grasso, who works on the floor of the NYSE, said he's seeing some big investors stay neutral as the market edges higher, and others who were short are down right angry.

Caterpillar was one of those companies that beat estimates and is benefiting from cost cutting - enough in fact to raise its full year forecast. However, it also said third quarter sales should be the weakest of the year. CEO Jim Owens, in an exclusive interview on CNBC's "Closing Bell," acknowledged things are bad, but also said something Wall Street has been betting it will see across the board. He said he sees "stabilization" and expects improvement in the fourth quarter going into next year.

Watch Interview With Caterpillar CEO

"Housing markets around the world, large infrastructure projects around the world, the commodity sector, capacity for energy, oil and gas, minerals. These are markets that are now dropped to cyclically very depressed levels," Owens said. "So I think the prospects over the next several years of a dramatic recovery in these markets is very high and we just want to be sure our company is very well positioned to take advantage of that global macro economic recovery, which we think well begin to get underway, if you will, in the fourth quarter and gain strength next year."

Brian Rauscher, director of portfolio strategy at Brown Brothers Harriman, points out that the number of companies significantly beating estimates (31 percent) is currently at the highest level, when compared to the past eight quarters final numbers. Industrials have shown the highest percentage of beats, at 85.7 percent, followed by consumer discretionary, 82.4 percent and health care, 77.8 percent.

He said revenue, excluding financials and utilities, is expected to fall 16 percent this quarter. Health care is estimated to be the only sector that will show an increase in sales, he wrote in a note.

Traders have been hopeful that strength in the technology sector will lead the market. After the bell Tuesday, chip maker AMD reported a wider than expected loss, but the strong report from Apple could be a positive for the sector Wednesday. Apple beat both bottom line and top line, reporting a 15 percent increase in profits to $1.23 billion on revenues of $8.34 billion. Apple said it sold 5.2 million iPhones while also seeing 2.6 million Mac computer sales.

What to Watch

Earnings reports are expected Wednesday morning from Boeing, Pepsico, Pfizer, Glaxo Smithkline, Morgan Stanley, Wells Fargo, Delta Airlines, US Bancorp, Eli Lilly, KeyCorp, Whirlpool, St. Jude Medical, and Stanley Works, to name a few. eBay, E-trade, Mosaic, and SanDisk report after the bell.

Wednesday's Blue-Chip Earnings

The only data of note is the FHFA house price index, reported at 10 a.m.

Exterior shot of the New York Stock Exchange.
Oliver Quillia for CNBC.com
Exterior shot of the New York Stock Exchange.

Bernanke appears before Congress for a second day, this time to deliver his semiannual monetary policy address to the Senate Banking Committee at 10 a.m. There are also several other hearings on the hill. One on regulatory reform starts at 10 a.m. before the House Financial Services committee, and SEC Chairwoman Mary Schapiro and the CFTC's Chairman Gary Gensler testify.

At 2 p.m., there is a House Financial Oversight Committee hearing on warrant repurchases and protecting taxpayers. President Obama also holds an 8 p.m. news conference, as he pushes health care reform.

From 'Mad Money':
Cramer: And the Oscar Goes to ... Bernanke

Tuesday's Markets

In Tuesday's market, the financials were the worst performing sector, down 0.8 percent as regional banks Regions Financial [RF Loading... () ] and Comerica [CMA Loading... () ] both reported losses amid a weakening commercial real estate market. The stock of Moody's Corp [MCO Loading... () ] also dropped sharply on news the U.S. Treasury sent a draft bill to Congress that would limit the power of rating agencies. CIT [CIT Loading... () ], meanwhile, fell after it warned it could still file for bankruptcy.

While the stock market held onto gains Tuesday, Treasury prices rallied as Bernanke also said interest rates would stay low for a long time as the economy recovers.

Rick Klingman, who runs the Treasury desk at BNP Paribas, said the futures market is still wrongly pricing in tightening of Fed funds in February of next year. Klingman said the Treasury market though liked the reassuring words from Bernanke that the Fed will keep rates low for now. "The market also liked the emphasis he put on pushing Congress to be more fiscally responsible," he said.

From 'Fast Money':

Can Market Rally Continue?

The yield on the 10-year slipped to 3.477 percent, and the two-year's yield edged lower to 0.914 percent.

The dollar rose 0.2 percent against the euro, to $1.4199 per euro. The dollar fell 0.6 percent against the yen.

Bond traders were also relieved that California appears to be making headway with its fiscal problems, after reaching a budget deal Monday.

Daniel Solender, Lord Abbett director of municipal bond management, said in an interview late Tuesday morning that California bonds were firming but they'd already traded in anticipation of the news.

More From CNBC.com

"I would not say they're out of the woods, but clearly this is positive," said Solender.

"The market may be down a tiny bit and California bonds are up about 5 basis points. The big move has been in the last couple of weeks. They've been up 40 to 50 bps in the last couple of weeks," he said. "...One of the strange things is some of the rating agencies downgraded them, but the bonds rallied despite the downgrade. The market had priced in the downgrade. At the same time, they were making the downgrades, there were headlines about the negotiations."

Solender said California, the largest municipal bond issuer, will give a boost of confidence to the muni market. "We've had good returns but at the same time people are concerned about how these states are going to handle this environment. With California being the lowest rated state, there's optimism higher rated ones can solve their problems."

Questions? Comments?