Market Insider

Wednesday Look Ahead: Earnings Trump Worries About Debt, Economy

Strong corporate earnings are trumping debt worries so far this week.

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Stocks soared Tuesday, supported by a stream of strong earnings reports and then boosted later in the day when President Obama reported progress in the debt ceiling talks.

Stocks looked past what ailed them in Monday's scaredy cat markets and found relief in a rush of better-than-expected earnings reports. As of Tuesday morning, 78 percent of the S&P 500 companies reported better than expected earnings and revenues, according to Thomson Reuters. IBM jumped nearly 6 percent on its strong earnings, helping to push the Dow to a 12,587, a 202 point gain and its best day since Dec. 1. The S&P 500 rose 21 points to 1326, and Nasdaq jumped 61 to 2826, its best day since Oct. 5.

Apple was perhaps the most stunning. It smashed expectationsand topped the whisper numbers for earnings and revenues. Its stock, already at a record, jumped above $400 in after-hours trading. Apple earnings more than doubled from last year at $7.3 billion or $7.79 per share, compared to $3.25 billion, or $3.51 per share the year earlier. Revenues were $28.6 billion, well above the expected $24.9 billion.

Jeff Kleintop, LPL Financial chief market strategist, said he used Monday's selloff to buy some Nasdaq names. "It just seemed like a great opportunity for us to take some money out of cash. We don't see huge gains for the market between now and year end — maybe 3 or 4 percent. So buying the dips is going to be key," he said. "We think technology could bounce back here." He said technology and industrials, two groups he likes, should benefit from business spending and the fact their sales are global.

Kleintop said he had been cautious on the market because of the macro issues, like sovereign debt problems in Europe and the struggles in Washington to strike a deficit reduction deal and a vote on the debt ceiling. The European debt issues will come to the fore again on Thursday when EU leaders meet to discuss Greece.

He expects Washington to increase the debt ceiling and strike a deficit-reduction deal. "If they don't get a deal done, that's a very negative scenario. The economy lurches back into recession. There's a financial market freeze up ... that would create a career ending backlash for legislators, and that would be immediately self correcting," he said.

"I think we'll get enough to kick the can (in the U.S.) down the road to just after the election in 2012," said Kleintop.

President Obama Tuesday afternoon announced a plan from the bipartisan "Gang of Six" Senators that could end the impasseover the deficit and debt ceiling.

The "Gang of Six" Senators were discussing a plan that would see an immediate $500 billion "down payment" on a plan that could lead to cuts of $4 trillion in a second piece of legislation. It would also raise revenues by $1 trillion over 10 years in new taxes. The debt ceiling needs to be raised by Aug. 2 in order to prevent a default by the U.S. and lawmakers are also working toward a deficit-reduction plan under threat of a downgrade to the triple-A U.S. credit rating.

Stocks rallied, bonds rallied and most commodities rallied, though gold declined sharply after the announcement.

"If there's widespread bipartisan support of the plan as a framework for ongoing discussions, it gives S&P (ratings agency) the ability to give us, say, another 90 days to bridge the gap between (Sen.) McConnell's plan and what they feel comfortable with. We've then taken the near term tail risk out. Bonds rally. Stocks go up. That said, that's my conjecture and we haven't heard from the House Republicans yet," said John Briggs, senior Treasury strategist at RBS.

Senate Republican leader Mitch McConnell's plan would give the president the ability to raise the debt ceiling in three installments through 2012, unless two thirds of Congress opposes the increases.

What to Watch

Earnings news will continue to pour in Wednesday, with morning reports from United Technologies, EMC, Blackrock, AMR, Abbott Labs, PNC, Piper Jaffrey, Northern Trust, St Jude Medical, US Bancorp and Altria. After-the-bell reports are expected from American Express, Intel, Qualcomm, E*TRADE, F5 Networks, Raymond James, Sallie Mae and Cheesecake Factory.

Companies reporting results on Tuesday

Two IPOs, real estate listing and information service Zillow and Skullcandy, an audio headphone maker, both priced above expectations at $20 a share. The two companies are part of a fresh rush of IPOs coming to market this month, a possible sign that underwriters see a more stable stock market.

British Prime Minister David Cameron will speak before Parliament on Wednesday to address the News Corp. phone-hacking scandal.

On the U.S. economic calendar, weekly mortgage applications are due out at 7 a.m. ET, existing-home sales are at 10 a.m and weekly oil inventory data is set to be released at 10:30 a.m.

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