Can the Market Hold On Amid Wave of Falling Profits?
Stocks are caught in an earnings season shakeout.
The third quarter is the first in three years, where profits are actually declining, and the stock market is taking notice.
As of Friday, earnings for the S&P 500 companies were expected to be off 1.8 percent for the quarter. In the coming week, more than 150 of the S&P are reporting, including Apple, Caterpillar, Boeing, Amazon.com, Merck, and AT&T. Earnings news will dominate, but there is also a two-day Fed meeting; the final presidential debate Monday, and important economic reports that include housing data and the first look at third-quarter GDP.
"Earnings, earnings, earnings — that's what we're focused on," said Patrick Boyle, CRT Capital managing director. "We were focused on earnings coming into this week and last week, and right now it's just letting us down." (Read more: Earnings 'Stink' So Far but Stock Selloff May Be Limited)
Stocks sold off sharply Friday after some high-profile earnings misses from big blue chips, like Microsoft and McDonald's. The Dow and S&P 500 closed out the volatile week barely changed, despite the selloff Friday that took the Dow down more than 200 points. (Read more: Stocks Log Worst Day Since June, Dow Falls 200)
"You've got to be a little nervous going into next week," said Boyle. But, he adds, because the market is "backstopped" by the Federal Reserve and European Central Bank "people want to buy the dips."
The S&P was up 0.3 percent for the week, at 1433, right at its 50-day moving average, while the Dow was off 0.1 percent at 13,343. The Nasdaq, hit by tech's selloff, lost 1.3 percent for the week to 3005. The S&P tech sector was down 2.4 percent, while materials were the best performers, up 2.1 percent.
Materials companies were expected to perform poorly this quarter but expectations for the technology sector had not come down as much and many investors were more heavily invested in tech than other sectors. Therefore, the selling by disappointed investors has been dramatic. Since the S&P's Sept. 14, 2012 high, tech has by far been the biggest laggard, losing 7.8 percent. Materials stocks were the second worse sector since then, down 2.9 percent, and energy was third, down 2. 8 percent.
"I would say this is just the beginning," said Carter Worth, Oppenheimer Asset Management's chief market technician. He said he expects another two- to three-percent decline, with the S&P heading to its 150-day moving average at 1380. Then, its direction remains to be seen.
"My bet is down. When we get there, it's how you go down there. If we were going to crash there (150-day) on Monday, I'd say we go lower," said Worth. In a note earlier in the week, Worth had identified the tech sector as heading for trouble. He said semiconductors and semiconductor-equipment makers were "literally coming apart." He also pointed out that some leading names, like Qualcomm, Apple, Microsoft nd Amazon were under pressure.