Stocks may be vulnerable 
in 4th quarter earnings blitz

With 10% S&P 500 results so far more than 67% beat revenue expectations

By Ryan Vlastelica (Reuters)

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Published: Sun 19 Jan 2014, 10:28 PM

Last updated: Sat 4 Apr 2015, 4:40 AM

The initial reads on earnings have been mixed, and yet US stocks are hovering near all-time highs. This week, investors will see whether the first companies out of the gate were a harbinger of what’s to come.

More than 60 S&P 500 companies are scheduled to release results this week, including more than half a dozen Dow components. The reports will give the fullest picture yet of how corporations are faring and whether the market can advance further as Fed stimulus begins to recede.

“Given that equities are fully valued and arguably overvalued, we need earnings and revenue to come through to support the gains we’ve already made,” said Jack Ablin, chief investment officer at BMO Private Bank in Chicago.

“There’s a reasonable chance we could see a 10 per cent correction in the event we get some high-profile disappointments.”

Earnings for S&P 500 companies are seen rising seven per cent in the quarter, down from the 7.6 per cent rate that had been forecast at the start of the year.

While the season started with many financial firms, including JPMorgan Chase & Co and Bank of America, topping profit expectations, Intel Corp sounded a sour note, slumping on a weak revenue outlook. General Electric Co sold off despite posting higher-than-expected revenue, suggesting blowout results may be needed to justify elevated valuations.

With 10 per cent of the S&P 500 having reported results so far, 50 per cent have topped earnings forecasts, well below the historical average of 63 per cent, according to Thomson Reuters data. More than 67 per cent have beaten revenue expectations, above the long-term average of 61 per cent.

Procter & Gamble, McDonald’s, Microsoft, Johnson & Johnson and Verizon Communications are among the Dow components scheduled to report this week. Texas Instruments and Starbucks Corp are also on tap. BMO’s Ablin said that results from more cyclical groups would be especially important for insight into the strength of the overall economy.

“The next leg of the cycle has to be driven by business spending,” he said. “I’m looking for clues that businesses are taking their excess cash flow and spending it, which means tech and industrial reports will be very important, especially any outlooks they offer.”

Another key name will be Netflix Inc, the S&P 500’s biggest gainer in 2013. The online movie renter’s stock nearly quadrupled last year, raising concerns it may follow the same path as another of 2013’s momentum favourites, Best Buy Co Inc On Thursday, the electronics retailer’s stock suffered its worst daily decline since 2002 after posting weak holiday sales and giving a downbeat margin forecast.

Jonathan Krinsky, chief market technician at MKM Partners in Greenwich, Connecticut, said the market was “absolutely vulnerable to a pullback on big disappointments,” though the S&P 500 might find support at its 50-day moving average, about 1.7 per cent below Friday’s close at 1,838.70.

“If we take that out, that would be the first time we’ve made a lower low in a while,” he said. “That could push us to retest the December low around 1,770.”

In the latest week, the Dow rose 0.1 per cent, the S&P 500 slipped 0.2 per cent and the Nasdaq climbed 0.6 per cent. Both the Dow and S&P 500 are within striking distance of all-time highs.

For the year so far, the Dow is down 0.7 per cent and the S&P 500 is down 0.5 percent, while the Nasdaq is up 0.5 per cent.

The forward price-to-earnings ratio for the S&P 500 is about 15.22, according to Thomson Reuters data, roughly in line with the historic average. While that suggests valuations are not tremendously stretched, further steep gains may be difficult to come by.

“We’re much more likely to fall on negative earnings than we are to rally on strong ones,” said Bruce Bittles, chief investment strategist at Robert W. Baird & Co in Nashville. “There’s much more downside risk than upside at these levels, and that will probably be the case until we work off some of the excess out there.”

This week will be a light one for economic data, with Thursday’s read on December existing home sales perhaps the biggest report. Sales are forecast to edge up for the month, according to economists.

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