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Earnings may be just good enough for stocks

How earnings are saving the market: Pro

A hot new sports car stock could leave a group of blue chips in its dust, as traders also watch earnings reports Wednesday to see if corporate profits are cooling.

Ferrari NV begins trading Wednesday after its initial public offering priced at $52, the top of the range Tuesday. The luxury sports carmaker has found plenty of interest in the 9 percent stake it offered, versus other companies' offerings that have been priced on the weak side. Both Nordstrom and Albertsons delayed their IPOs in the past week, and First Data Corp. went ahead with its big IPO though its stock is trading under the $16 offer price.

Earnings are expected from Boeing, Coca-Cola, General Motors, EMC, Abbott Labs, St. Jude Medical, Kimberly-Clark, Baker Hughes, Polaris Industries, Northern Trust, Sky, ARM Holdings, ManPower Group and Owens Corning before the bell. American Express, eBay, Texas Instruments, Tractor Supply, Fortune Brands, Kinder Morgan, Morningstar and Sallie Mae report after the close.

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While S&P 500 companies are mostly beating on the bottom line, 60 percent have seen weaker revenue growth. Profits are expected to decline by about 4 percent this quarter, according to Thomson Reuters.

Some analysts worry that corporate outlooks are indicating another soft quarter for profit growth ahead, though about 70 percent of S&P 500 companies beat earnings estimates.

"Earnings are kind of coming in line with expectations. Companies are beating by an aggregate, a little less than they have in the last couple of years but a little bit closer to long-term trends," said Jonathan Golub, RBC Capital Markets' chief market strategist. "If there's a story, it's the big banks, and it's death by a thousand cuts. It's not that there's one story. There's 10 different stories causing each bank to have a bad number. Some are just OK and some are poor. If you took out the prior year's litigation costs, underlying growth is weak."

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Golub said the earnings so far are good enough for the market, a concern among analysts this quarter. "All of the strength is coming from margins, not revenues. They haven't seen that in the last four years. I think we're in a weak-revenue environment and people are compensating by pushing harder on the margin line, quite successfully. There's nothing that tells us we're not on course."

BMO Private Bank CIO Jack Ablin said he is more cautious since the S&P 500 is up nearly 10 percent in the past year while investors expect only 5 percent profit growth over the next four quarters. He said the three big drivers of profit margins — interest rates, commodity prices and labor costs — are currently not tailwinds. That could change, and they could be factors that would weigh on profit margins.

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"It just seems like growth isn't really too abundant so we're resorting to monetary policy and financial engineering," he said.

Golub said the market can continue to move higher, now that it has mostly completed a bounce back from its recent lows but at a slower pace. "The correction is largely faded away. We're only 3 to 4 percent from all-time highs, and we're moving back toward a trend that we were on previously, and the earnings are absolutely sufficient to take it there."

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Steve Massocca of Wedbush Securities agrees the market should keep going higher. He does not expect the Fed to hike rates this year, or possibly even next year, a positive for stocks.

Stocks Tuesday traded quietly with the Dow down 13 at 17,217, and the S&P 500 off 2 at 2,030.

"I don't think we're going to break through the August lows, and I don't think we're going to get back above the September highs. This will continue now until we have the full assessment for third-quarter earnings, which we're still a week away from. Assuming we go through that, and the market stays in its trading range, the next big assessment will be the holiday season. How does it go? And does the Fed do something in December?"

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