Week Ahead: Surprise Surprise—The Market's Found Something to Cheer About
The not-so-surprising, positive surprises in corporate earnings news could steer the stock market in the week ahead.
With the European bank stress tests out of the way, investors may shift focus to what's got the stock market perking up in the last couple of days. That would be the 42 percent jump in S&P 500 profits so far this quarter, combined with cautious, but not scaredy-cat comments from corporate executives on the outlook.
Big oil, including BP and Exxon Mobil , joins the list of industries releasing results in the week ahead (see page 2 for more). About 24 percent of the S&P 500 report, including insurer Aflac, aerospace giant Boeing , industrial DuPont and credit card company Visa.
"My view is the message that's come from earnings season has been very strong," said Barclays Capital's Barry Knapp. "What we've heard from transport companies, the package carriers, like UPS, the rails like UNP, the airlines is that revenues are up a lot. The outlook is good. Guidance is getting pushed higher, and there's no sign of a slowdown in the next quarter."
With more than a third of the S&P 500 reporting so far, 78 percent of the earnings beat estimates and 67 percent of companies have beaten revenue estimates. But this good flow of earnings news will have to fight it out with a moderate stream of economic data, that could disappoint in the coming week.
"The risk reward in the macro numbers next week is pretty good. The earnings are coming in strongly so you have to think we have a little bit of upside here," said Knapp, who heads U.S. equity portfolio strategy.
Goldman Sachs economist Andrew Tilton said the big numbers he's following are Friday's release of second quarter GDP and any industrial data, particularly the durable goods for June. "Collectively there's a lot of information on the industrial situation next week and that will show whether that trend is going to extend or whether what we saw in the ISM is short-lived," he said. The ISM, a measure of manufacturing, was weaker than expected at 56.2, when reported at the beginning of the month.
Economists have been paring back second quarter GDP after a string of softer-than-expected data. Goldman cut its GDP forecast to 2 percent from 3 percent last week.
Tilton said GDP will be more informative than usual because this release will include revisions going back to 2007. "One of the issues that forecasters disagreed with this year is whether employment overshot to the downside," he said. Revisions to GDP, and by extension unemployment, may bring clarity to that.
"Our view is the labor market is terrible, but our view was not a surprise given how bad the economy was," he said.
Jefferies managing director Art Hogan said the market is expecting a 2.5 percent GDP. "If we get a negative surprise, and the market can only assume we only revise the numbers down, that could be bad for the market," he said.
"Although it's a robust economic calendar, I don't think there's enough to topple the apple cart so I really think the earnings will take over the news and the market will be fine," he said.
Knapp said revenue growth could pick up to about 12 to 13 percent for the S&P 500 companies this quarter, better than the expected 10 percent level. It's currently at 11 percent.
"Only about 8 percent of the energy companies have reported, and that could get the revenue growth up...12 to 13 percent S&P revenue growth is not consistent with a double dip," he said. Analysts had also expected profit growth of 27 percent, but it is running well ahead of that pace so far.
In the coming week, there is also housing data in the form of new home sales Monday, and the S&P/Case Shiller home price index is out Tuesday. Consumer confidence is reported Tuesday, while consumer sentiment is released on Friday. On Wednesday, durable goods and the Fed's Beige Book on the economy are released. Weekly jobless claims are issued Thursday. Friday's reports include the employment cost index and Chicago purchasing managers. The Dallas Fed's survey is released Monday, and the Richmond Fed's survey is issued Tuesday.
The Treasury also auctions more than $100 billion in 2-year, 5-year and 7-year (click here for at-a-glance bond prices) next week.
One Way Market's Upside 'Could Be Violent'
Stocks saw their second best week of the year in the past week, with the Dow up 3.2 percent at 10,424; the S&P 500 up 3.6 percent at 1102, and the Nasdaq, up 4.2 percent at 2269. The Russell 2000 was up 6.6 percent, and is now up 4.4 percent for the year. The Nasdaq is flat for the year, and the Dow is down just 0.03 percent. The S&P is still down about a percent year-to-date, but it crossed above the important 1100 level Friday.
Industrial stocks were the best performers of the week, lifted by positive earnings news. The group was up 7.2 percent, followed by materials, up 7 percent, and consumer discretionary, up 5 percent. Treasurys saw 2-year yields touch a record low this past week, and the 10-year stayed under 3 percent but touched 2.998 Friday. As stocks climbed Thursday and Friday, Treasury yields climbed as prices fell.
"Right now, we're allowing this stock market to trade on 12 times earnings with all of the much stronger earnings and a sub-3 percent Treasury," said Wells Capital Management chief investment strategist James Paulsen. In order for the market to move out of its range, Paulsen said there has to be good news on jobs.
"I think you need a good piece on jobs, but if we get that, it could be violent. You could have a huge movement in stock prices and bond prices," he said.
Knapp said the stock market though could stay on an upward trajectory for a little while longer, but he expects it to stumble by August as investors shift their focus to the November mid-term election and fiscal worries. He also expects next year's earnings to be a concern since the street estimates are currently too high.
"There's probably scope to rally a little further to 1125 to 1150, at the most, but we won't go above the old highs," he said. As he watched Fed Chairman Ben Bernanke testify before Congress in the past week, Knapp said he noticed that about half of the questions directed at the Fed chairman were about the deficit.
Even with Friday's stock market rally, there was clear disappointment about the severity of the European bank tests, which resulted in requiring 3.8 billion euros of new capital to be raised. Just seven of 91 banks failed the test.
"My point of view on this is the market reaction has led people to the wrong conclusion on this. It was not good. I don't think it's enough to cause the market to go down because the growth outlook has improved enough in both Europe and the U.S.," said Knapp, adding the street expected 80 to 100 billion euros to be required. He said the Europeans permitted a lower quality of capital to be reported in their core Tier 1 capital, allowing banks to escape large shortfalls.
"They just decided to punt on what type of capital to use. To me, it's just not enough of a test," he said.
Besides oil companies, there are tech, consumer products, drug, industrial and financial companies reporting. On Monday, Reinsurance Group of America, Alcon, Beckman Coulter, Legg Mason, Masco and Transatlantic Holdings report.
BP reports Tuesday and it will of course be watched for impact from the Gulf oil spill. DuPont reports Tuesday morning, as do Cummins, Bemis, Deutsche Bank, Ecolab, SAP, Nasdaq OMX, Lockheed Martin, Occidental Petroleum, U.S. Steel, Valero Energy, Teva Pharma, and Under Armour.
After the bell reports Tuesday are expected from Aetna, Aflac, Boston Properties, Norfolk Southern, Nalco, DreamWorks and CB Richard Ellis.
Boeing, Comcast, ConocoPhillips , Arcelor Mittal, Corning, Newmont Mining, Southern Co, Sprint Nextel, WellPoint, General Dynamics, Hess, Martha Stewart and Wyndham Worldwide report Wednesday, before the opening bell. Visa , Akamai, BMC Software, Assurant, FMC, Lincoln National, Citrix, Symantec, Varian and Vertex Pharmaceutical report after the close that day.
Thursday's releases include Exxon Mobil, Royal Dutch Shell, Sanofi-Aventis, Avon Products, Barrick Gold, CME Group, Colgate-Palmolive, Covidien, Snapple, Goodrich, Interpublic, Kellogg, Mack Cali Realty, Moody's, Motorola, Mylan Labs, Noble Energy, Nissan, Potash, Raytheon, Sony, Siemens, Southwest Air, Tyco, Williams Cos and Waste Management. Amgen, Genworth Financial, McAfee, MetLife and Expedia report in the afternoon on Thursday.
Chevron and Merck are the big names Friday morning. Also reporting are Fortune Brands, Newell Rubbermaid, Weyerhaeuser, Simon Properties and Borg Warner.
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