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Earnings Are the Next Big Test for Stocks

Corporate earnings are the latest hurdle for a stock market that has been navigating an environment of slowing growth.

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In the coming week, the second quarter earnings seasonkicks off with just a few reports, but they will be important early looks at whether the fallout from Europe and the slower global growth is hurting corporate America. Alcoa is first out on Monday, followed by an interim report from Chevron Wednesday. Results Friday are expected from JPMorgan, which was hit by a controversial derivatives trading loss, totaling billions.

After Friday’s disappointing U.S. June payrolls, jobs-related data, such as Thursday’s weekly jobless claims, will be monitored, as will the minutes of the last Federal Reservemeeting Wednesday. But more important, perhaps, is a batch of fresh Chinese data, starting off Monday with inflation and export data, and winding down Friday with GDP, retail sales, and industrial output.

“There’s a number of things to worry about in the earnings reports. We had downward revisions in the GDP number in the second quarter, which bothers me,” said James Paulsen, chief investment strategist with Wells Capital Management. “That generally leads to disappointing earnings numbers. My biggest concern for the S&P 500, is that the (dollar index) is up more than 5 percent in the quarter. That might take on significance.”

Paulsen said the dollar impact on profits could hit multinationals repatriating profits. “You’re going to hear it in different ways. They’ll be talking about the same thing but they’ll be talking about how weak pricing was,” he said.

Daniel Greenhaus, chief global strategist at BTIG, said company comments in the last earnings period were an early warning for the current economic sluggishness. “If you listened to the industrials in the first quarter, the industrials all said the same thing. It was Brazil. It was China. It was Europe,” he said. “A minority have suggested that their particular situation is better than expected. What will be interesting is how much companies that are particularly exposed to Europe indicate their expectations going forward and is that much worse than the Street (expects).”

Greenhaus said earnings expectations for the second quarter have been coming down for a while. While the consensus is for a 2 percent decline, he said the final numbers could be better. “I think you’ll come in closer to flattish. This is a huge moving target right now,” said Greenhaus.

“Even if we beat, it’s not going to be very good,” he said. Energy profits should be particularly hard hit, after the 20-percent decline in oil pricesin the quarter. “The energy sector is a big wild card, given the big fall in oil. They are a big earner. The banks too. Forgetting the regulatory side of things, the trading environment has been bad,” he said.

Greenhaus said he would stay away from the financials, noting the latest regulatory problems swirling around the industry with the wideningLibor-fixing scandalwhich resulted in the ouster of Barclays chairman and CEO in the past week. Barclays settled last month with U.S. and U.K. regulators over allegations its traders manipulated Libor, the key London Interbank Offered Rate.

Paulsen said he has been overweight the financial stocks but the Libor investigations and the JPMorgan trading losses worry him. “The reason I went back overweight banks was primarily because confidence improved, but there’s a bad side to both of those events. Where they really hit home is they hurt the confidence in the one industry where we really need to rebuild it.”

Financials were the second worst performers of the past week, down 1.2 percent, after a 1.4-percent decline in industrials. The Dow in the past week was down 0.8 percent, to 12,772, after a 124-point drop Friday on June’s weak employment report, which showed just 80,000 new jobs. The S&P 500 finished the week at 1354, off 0.6 percent, and the Nasdaq was down less than a tenth of a percent at 2937. Despite a choppy second quarter, the S&P is still up 7.7 percent year to date.

“I like how the market is doing better than people would think. I think the underlying data is doing better than the jobs data and I think that’s what the stock market might be pricing in. We’re probably up close to 10 percent year to date, total return with dividends, which is really a phenomenal first half of the year,” Paulsen said.

Paulsen said the market may be getting desensitized to headlines from Europe, and that it may have already been pricing in the second quarter’s weak earnings. “The May and June lows in the market might well have discounted a sloppy earnings quarter,” he said.

In the coming week, there’s a Euro group meeting on Monday and EcoFin finance ministers meet on Tuesday.

What Else to Watch

Markets will be waiting to see what the economic picture from China looks like in the coming week. China surprised markets with a second round of interest rate cutsin the past week, raising speculation that the data will be weak.

“Irrespective of next week’s data, the bigger story is whether the second quarter is the trough, and you get acceleration into the second half of the year, which is my and everybody else’s assumption for the second quarter,” said Greenhaus.

“What we care about is the GDP number. The consensus is 7.7, but there is increasing speculation, some would call it the whisper number, that the number will be much lower, and that’s one reason why China cut interest rates,” he added.

Robert Sinche, head of global foreign exchange strategy at RBS, said the number he’s particularly interested in is new loans, expected sometime in the week ahead. “We think new loans will give us information about future growth,” he said, adding he is also interested in the GDP reading.

“For us, China data, that has become the source of stability or hope for stability,” Sinche said.

Monday

Earnings: Alcoa

0100 am Chicago Fed President Charles Evans on policy in Thailand

1155 am San Francisco Fed President John Williams on economy

1500 pm Consumer credit

Tuesday

Earnings: Shaw

0605 am St. Louis Fed President James Bullard on euro zone

0730 am NFIB small business survey

1000 am JOLTS job openings

1300 pm $32 billion 3-year note auction

Wednesday

Earnings: Burberry, Chevron (interim), Marriott, Texas Industries

0700 am Mortgage applications

0830 am Trade balance

1000 am Wholesale trade

0100 pm $21 billion 10-year note auction

0200 pm FOMC minutes

Thursday

Earnings: Fastenal, Commerce Bancshares

0830 am Jobless claims

0830 am Import prices

0100 pm $13 billion 30-year bond auction

0200 pm Federal budget

0340 pm San Francisco Fed’s Williams on lending

1000 pm China GDP

Friday

Earnings: JPMorgan Chase, Wells Fargo

0830 am PPI

0955 am University of Michigan consumer sentiment

0120 pm Atlanta Fed President Dennis Lockhart on economy

Follow Patti Domm on Twitter: @pattidomm

Questions? Comments? Email us at marketinsider@cnbc.com

  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

  • CNBC Senior Commodities Correspondent and Personal Finance Correspondent

  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

  • Senior Producer at CNBC's Breaking News Desk.