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Tuesday Look Ahead: Earnings Get Rolling but Economy May Call the Shots for Markets

As the earnings season gets rolling, investors are anxious about the strength of the quarterly reports but also the economy.

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Stocks sold off Monday after Standard & Poor's revised its outlook on the United States to negative and said it may reduce the AAA sovereign rating, if the federal budget deficit is not adequately dealt with in two years. The Dow fell 140, or 1.1 percent to 12,201 in its biggest decline in a month. The S&P 500 slumped 1.1 percent, or 14 points to 1305, its lowest close since March 23.

Bonds, meanwhile, saw buying interest as investor concerns about European sovereign issues outweighed the S&P comment. S&P rival Moody's also left its outlook for the U.S. unchanged. The 10-year Treasury finished the day with a yield of 3.373, its lowest yield since March 23.

"We've had a very strong bid in this market since we hit 3.62ish in the 10-year note about two weeks ago..the data has been coming across as far more balanced, if not weak in many, many aspects," said David Ader, chief Treasury strategist at CRT Capital. On the weekend, Goldman Sachs economists were the latest to cut their first quarter GDP forecast, to 1.75 percent from 2.5 percent previously.

Tuesday's data includes just housing starts, which are reported at 8:30 a.m. But there are plenty of major corporate earnings, including financial companies Goldman Sachs, Bank of NY Mellon, Northern Trust, State Street, and US Bancorp. Johnson and Johnson, Novartis and Peabody Energy also report before the bell.

Tech dominates the afternoon's reports, with earnings from IBM, Intel, Yahoo, Cree, Juniper Networks, Seagate, and VMWare. CSX, Stryker and Intuitive Surgical also report.

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Stocks recovered from the day's worst levels, which had the Dow dipping more than 200 points. Traders have been concerned that earnings won't provide the home runs seen in recent quarters, with margins under pressure from rising costs. They are worried that financials are not seeing much in the way of loan growth, and that tech companies will be hit by supply chain concerns, in the aftermath of the Japanese earthquake and tsunami.

Texas Instruments Monday confirmed some of those fears. Its shares fell after reporting earnings below Wall Street's consensus forecast. Texas Instruments had profits of $666 million or $0.55 per share, up slightly from $658 million or $0.52 per share, but below the $0.58 per share expected. The company said the Japanese earthquake hurt profits by $0.02 per share.

"We're obviously in the beginning of earnings season, which we thought would be a little messy in the beginning because we start out with financials and technology, which have different issues," said Barry Knapp, head of equities portfolio strategy at Barclays Capital.

"The earnings themselves were never estimated to be very stellar. The technology sector has a lot of uncertainty with respect to the supply chain issue. The other big sector coming this week is going to be the industrial sector, and that, we think, is going to be a big positive, particularly on the margin front," said Knapp. He pointed to W.W. Grainger, which rose Monday after reporting better-than-expected earnings and margin improvement.

Knapp said the other big issues facing the market in the next couple of weeks include the Fed meeting next Tuesday and Wednesday. Fed Chairman Ben Bernanke will hold the first in a new series of quarterly media briefings at the end of the meeting. Knapp expects the Fed to announce that its quantitative easing program will expire in June, as expected, and also provide some clarity on its program to purchase Treasurys as mortgage securities in its portfolio expire. He also is looking for some guidance on the Fed's exit strategy from its easy money policies.

Knapp said the market's are also focused on the debt discussions in Washington and economic reports, including the upcoming April jobs report on May 7.

"There's earnings, the Fed, the debt negotiations but to me the data could trump all of that if it's strong," he said. Knapp said so far April is off to a good start, based on chain store sales, auto sales and the Empire State survey.

Questions? Comments? Email us at marketinsider@cnbc.com