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Market Outlook: Earnings Will Take Center Stage This Week


U.S. stock investors will be taking their cues this week from a barrage of earnings reports as well as from economic data on housing activity and sales of big-ticket items.

When it comes to deciphering earnings reports, "it's all about the outlook," said John Buckingham, chief investment officer and portfolio manager for the Al Frank Funds.

He noted that Apple posted a 78% increase in profits last week and said it sold more than 21 million iPods. But skittish investors sent the stock lower after the company forecast that profit in the next quarter would fall short of expectations.

Among the hundreds of companies reporting earnings this week will be Pfizer, Johnson & Johnson and Abbott Laboratories in the drug sector, Bank of America and Wachovia from the U.S. roster of banks, and DuPont, with its blue-chip industrial pedigree.

Companies Reporting This Week

In addition to its earnings report on Monday, Pfizer has promised results of a review of its "strategic direction" with investors anticipating major changes under new Chief Executive Jeffrey Kindler.

"Pretty Good Results"

"Companies made money in the second quarter and the third quarter," said Michael Cuggino, president and portfolio manager of the Permanent Portfolio Funds in San Francisco. "I suspect for the most part, they're going to continue to report pretty good results for the fourth quarter."

Cuggino believes the fourth-quarter results will continue the long string of double-digit increases, but the year-over-year gains may be in the high single-digits when 2007 results come out.

According to Reuters Estimates, fourth-quarter earnings for companies in the Standard & Poor's 500 are expected to rise 9.7% over a year ago. The calculation includes actual numbers for companies that have reported earnings and estimates for the remainder.

Carl Birkelbach, chief executive of Birkelbach Management in Chicago, thinks investors may be in for some disappointments this week.

"Whereas last year, the market went up as a whole, it is now going to be more mixed, more rotational. You're going to have to be in the right industries at the right time," Birkelbach said.

For the month of January so far, all three indexes are higher, with the Dow up 0.82%, the S&P 500 up 0.86% and the Nasdaq up 1.49%.

Economic Data Out

Among the economic data on the radar this week will be existing home sales on Thursday and new home sales on Friday. Durable goods orders are also scheduled for Friday.

A Reuters poll shows economists on average forecast sales of existing homes in December were at a 6.25-million-unit annual rate, down slightly from 6.28 million in November.

Sales of new homes in December are forecast at 1.05 million units, essentially in line with the previous month.

"In home sales, the real issue is how much discounting the builders have done," said Buckingham, who owns stocks of more than a dozen builders, including Lennar Corp. <LEN.N>.

Buckingham said he does not pay much attention to short-term housing numbers and instead focuses on the long term, where he thinks demographics and a shortage of desirable land work in favor of the builders.

Orders for durable goods, which are big-ticket items such as refrigerators and washing machines meant to last three years or more, are expected to rise 2.5 percent in December, according to the Reuters poll. In November, overall durable goods orders rose 1.6 percent.

Oil A Big Factor

The price of oil also will be on the minds of investors, as the recent brief dip below $50 per barrel eased some of the perennial concern about inflation.

Jim Hardesty, president of Hardesty Capital Management in Baltimore, noted that the airline and aircraft segments are obvious beneficiaries.

"Energy is critical to any major industrial company and that's been a clear drag in the last couple of years. It's now turning into a positive thing," he said.

On Friday, February crude oil rose $1.51 to settle at $51.99 a barrel on the New York Mercantile Exchange. That was down 34% from NYMEX crude's record high of $78.40 a barrel set last July.

Finally, some investors will be tuning in Tuesday night to the State of the Union, the president's annual address to Congress. President George W. Bush is expected to discuss energy and environmental issues facing the United States, among other topics.