Market Insider

Week Ahead: Earnings Tell Two Tales


By the end of the coming week, the corporate earnings picture will be clear, and it may not necessarily be one the stock market likes.

A barrage of earnings news is coming from major banks, big tech, biotech, transports, industrials and pharmaceuticals. We've had just a taste so far. Financial companies have exposed the dents they're taking from the credit crunch, retailers revealed sales weakness, and home builders are in the tank. Some domestic focused companies say they're seeing softness -- like truck-leasing company Ryder System, which cut its profit forecast, blaming an economic slowdown that's spread beyond housing and into other sectors.

But companies with big international exposure, like McDonald's , are telling a tale of improving profits thanks to the weaker dollar. General Electric , CNBC's parent, reported third-quarter earnings right on target and said the outlook for the rest of the year is strong.

"A lot of good things are going on that I like, but one thing I don't like is that business costs are rising faster than prices. Earnings are slowing down to a crawl and domestic earnings are falling," said CNBC's Larry Kudlow.

Shaved Growth

Thomson Financial Friday reported that it no long expects profit growth this quarter for the S&P 500 companies as a whole. Its forecast for growth was up 1.4% just last Friday, and it is now negative 0.1%. That would be the first quarter without growth in five years, if it sticks. Thomson recalculates that number as earnings results and warnings roll in. In July, the outlook was for 6% profit growth for the quarter.

"I think a lot of companies will talk about uncertainties going forward," said BlackRock Chief Investment Officer Robert Doll. "Most of them will report reasonable business trends currently, but uncertainty about what the future brings and that will be mostly domestic companies, less from global."

"We've had some pretty big negative pre-releases, mostly from financials, which looks like it's going to take the third quarter earnings number maybe a little bit into negative territory...but we think there will be many more positives than negatives," said Doll.

What does this mean for the stock market? "More volatility, rather than less, will be the order of the day in both directions," he said.

For the week, the Dow finished up just 27 points, or 0.19% at 14,093. The index is up 13.1% year to date. Nasdaq rose to 2805, finishing the week up 0.91%. It is up 16.2% for the year so far. The S&P 500 rose just 0.27% to 1561.

Crash Revisited

This week, the markets will have to tip toe past the twentieth anniversary of the 1987 stock market crash Friday. Doll will appear on "Squawk Box" Monday, where he will discuss his outlook on the market and his memories of the 1987 crash.

Interestingly, he told me the lack of visibility in the markets in the recent credit crisis reminded him most of that dark day after Black Monday when stock quotes were impossible to find and the market didn't really trade on the opening. Doll worked at Oppenheimer Funds at the time. He said the real market bottom that year came in early December, and buyers at the time set up big gains for 1988.

I remember that day after the big crash, too. My editors at Reuters wanted met to write something about what was happening in the market. I had covered the market's collapse, beginning with the meltdown in takeover stocks that started days before. Black Monday was shocking, but not a huge surprise if you talked to traders in those broken deal stocks the Friday before.

But that Tuesday after Black Monday, we couldn't figure out what was trading and what wasn't trading. Quote systems weren't working. There were no buyers. Some Nasdaq stocks were abandoned by their market makers. That was our story, and it wasn't until the big Wall Street firms collectively stepped in to buy later that morning did the market start to move.

Credit Un-Crunched

Back to the future. I asked Doll about the credit crunch, and he said the markets have come along way towards recovery, but the problems are not over yet. "There are going to be more credit issues, but that they all gang up and create illiquidity and seizing up in markets...hopefully that was a one time event," he said.

"There's still a lot of questionable credit on balance sheets that will be tested and examined if we are right about slowing growth," he said.

Doll said the next earnings hurdle to address after fourth quarter guidance will be when analysts start to reexamine their estimates for 2008. "'08 earnings are forecast to be up 11 to 12% over '07. If in fact, we have below trend economic growth, two-ish percent real, it's impossible in our mind to get double digit earnings growth. A lot of noise has focused on this year, and hasn't done a lot on next year."

CNBC's Managing Editor Tyler Mathisen agrees with that concern about 2008. "My guess is '08 is not as good for corporations or the stock market as '07," he said.

Earnings Central

On Monday, the big story will be Citigroup, which reports before the bell and holds an analyst conference call. Citi already let out of lot of the big news, including the size of its earnings hit and the exit of two senior executives. But rumors persist, and CNBC's Jim Cramer reports from sources that Citi CEO Chuck Prince may be out of a job by the end of the week.

Mattel also reports Monday. We'll see what toll bad toys from China and the related public relations issues will have on its performance. After the bell, Genentech reports.

On Tuesday, big techs start to report with afternoon releases from IBM , Intel and Yahoo . Johnson and Johnson is the first big drug company out of the box. Wells Fargo , State Street , KeyCorp , US Bancorp , and Thornburg Mortgage are among the financial names reporting that day. Transports Delta Airlines and CSX also report Tuesday.

Wednesday is a big day for financials with J.P. Morgan , CIT , Northern Trust , and Piper Jaffray . We'll see if the dollar puts more fizz into Coca-Cola's numbers that day, and we'll hear from Altria , United Technologies and Abbott Labs .

Google will show whether it can sustain its high-flying stock price when it reports Thursday afternoon.

Thursday morning, Bank of America reports, along with a bunch of other financials including Allstate , Bank of New York and SunTrust . Drug company reports are prominent Thursday with early releases from Lilly , Pfizer , Novartis and Wyeth . Unitedhealth and St. Jude Medical are on Thursday's list, as are Union Pacific , Continental Airlines and Southwest Air .

Friday is the day for industrial might. We get Dow components Honeywell , Caterpillar and 3M .

If this week is like last week, there will be plenty of other corporate news headlines. We know that General Motors holds its first investors conference where it will detail the numbers in its new contract with the United Auto Workers Monday morning. CNBC's Phil Lebeau will report on the developments.


Housing data, an inflation number and manufacturing data are all on the agenda next week. The most important economic news could come Monday evening when Fed Chairman Ben Bernanke speaks before the Economic Club of New York at 7 p.m. He will take questions and, as usual, traders will monitor his remarks closely to try to glean where the Fed stands on the economy, inflation and the possibility of a rate cut Oct. 31. Traders have pared back their expectations for a rate cut that day but you can bet they haven't given up hope.

At the end of the week, the IMF/World Bank board of governors starts its annual meeting in Washington D.C. European Central Bank President Jean-Claude Trichet will be speaking in Washington and traders will be watching for dollar-related comments as banking officials descend on the capital.

On Monday, the Empire State Manufacturing survey is reported. On Tuesday, the NAHB Housing Market Index is released at 1 pm, and housing starts and building permits are reported Wednesday morning. Industrial production and capacity utilization are released Tuesday. CPI, consumer inflation data is reported Wednesday, as is the Fed's beige book on the economy. The beige book release is at 2 p.m. Wednesday. The oft times market moving Philadelphia Fed survey is reported at noon Thursday, at the start of "Power Lunch." Consumer sentiment is Friday at 10 a.m.

Oil inventory data is released by the government Wednesday. Oil finished out the week at a record $83.69 per barrel, up $2.47 or 3.04%. Oil Friday hit a new intraday high of $84.05 per barrel.

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