By Wallace Witkowski, MarketWatch
SAN FRANCISCO (MarketWatch) -- Taking the long-term view is
probably the best course of action for investors given the weakness
of first-quarter results as we head into the peak week of
first-quarter earnings season with reports from heavyweights like
Apple Inc., Microsoft Corp., and AT&T Inc.
Stocks ended the holiday-shortened week with their best weekly
gain in nine months on mixed earnings in the tech and financials
sectors. The Dow Jones Industrial Average (DJI) and the Nasdaq
Composite Index (RIXF) both finished up 2.4%, while the S&P 500
Index (SPX) gained 2.7%.
As we enter one of the weakest earnings seasons in several
quarters, one encouraging sign for market history buffs is that the
S&P 500 rallied to show a slight gain for the year just before
Easter after starting last week in the red.
With regards to earnings, Brian Belski, chief investment
strategist at BMO Capital Markets, said investors need to take a
longer view on stocks and not just jump from earnings season to
earnings season.
"I think investors in general make a huge mistake in companies,
building a strategy on quarterly earnings alone," said Brian
Belski, chief investment strategist at BMO Capital Markets. "The
recovery is more of a marathon than a sprint."
No sense getting myopic now
That sort of long term view is backed up by a recent analysis
from Jeffrey Kleintop, chief market strategist at LPL Financial.
Kleintop notes that we're currently in the weakest earnings cycle
in 55 years with an annualized growth rate of 2.8% since the last
market peak in the second quarter of 2007. The average growth rate
is 7.8%.
While investors have been concerned that valuations have been
getting ahead of earnings, Kleintop notes that for the most part,
earnings have kept pace with valuations since June 2007 with
S&P 500 earnings per share growing 21% and the S&P 500 also
growing 21%.
Still, a further rise in stocks will have to be on the back of
earnings growth, and while not as evident in first-quarter
earnings, the rest of the earnings year will be decisive in
determining the course of the market.
Even though only 16% of the S&P 500 has reported earnings
this season, outlooks are looking less negative than usual,
especially since they've been more negative than average recently.
With 15 S&P 500 companies having given an outlook for the
second quarter so far, only 9, or 60%, have issued an earnings
guidance that falls below the Wall Street consensus, according to
John Butters, senior earnings analyst at FactSet. While still early
in the game, that's below the five-year average of 65%, according
to Butters.
As always, outlooks will be key heading into this peak week to
get an idea of how Corporate America sees its growth prospects
after a first quarter marred by bad weather. While first-quarter
earnings for the S&P 500 are expected to decline 1.3% from a
year ago, they're currently expected to grow 7.6%, 10.7%, and 11%
for the second, third, and fourth quarters, respectively, for a
2014 growth rate of 8.2%, according to Butters.
BMO's Belski suggests focusing on companies that have higher
quality earnings, those where cash earnings represent a larger
portion of reported earnings per share and rely less on accounting
tricks. Those companies tend to perform better over the long term
regardless of the earnings environment, returning an average
compound annual growth rate of 14.3% since 1990, compared with the
9.8% return for the S&P 500, Belski notes.
Companies that fall into that category reporting this week
include Halliburton Co. (HAL), Qualcomm Inc. (QCOM), AbbVie
Inc.(ABBV), and Gilead Sciences Inc. (GILD)
One of the advantages of not getting caught up in the short term
is that a market correction is long overdue and that investors are
more and more divided into two camps: that of complacency and that
of expecting a big drop of more than 10% any day now.
"This year could be a sell in April," Belski said. "Corrections
tend to happen when people least expect them." For his part, Belski
maintains his 1,900 S&P 500 target for the year, meaning when
all is said and done, he only expects the index to gain another
1.9% by the end of the year.
From a tactical perspective, over the next six to 12 months,
Belski suggests that the energy, health care, industrials, and tech
sectors could offer attractive opportunities, as shown in the chart
below:
Highlights of earnings peak week
This week is the peak of earnings season with 11 Dow components
reporting and more than 150 components of the S&P 500 posting
results.
Telecom will figure heavily with 93% of the sector's market cap
weight reporting with earnings from Dow components AT&T (T) on
Tuesday and Verizon Communications Inc. (VZ) on Thursday.
It will be another big week for tech earnings with 48% of the
sector's market cap weight reporting as Apple (AAPL), Facebook Inc.
(FB), and Texas Instruments Inc. (TXN) post results on Wednesday,
and Dow component Microsoft (MSFT) reports Thursday.
Industrials round out the Big 3 of sectors reporting with 47% of
the sector's market cap posting results this week with United
Technologies Corp. (UTX) on Tuesday; Boeing Co. (BA) and Dow
Chemical Co. (DOW) on Wednesday; with 3M Co.(MMM) and Caterpillar
Inc. (CAT) on Thursday.
Other big names rounding out the week include Netflix Inc.
(NFLX) and Kimberly-Clark Corp. (KMB) on Monday; McDonald's
Corp.(MCD) , Travelers Cos.(TRV) , Amgen Inc.(AMGN) , Intuitive
Surgical Inc.(ISRG) , and Comcast Corp. (CMCSA) on Tuesday; Procter
& Gamble Co. (PG) , Biogen Idec Inc.(BIIB) , and Yum Brands
Inc. (YUM) on Wednesday; Visa Inc. (V) , Amazon.com Inc. (AMZN) ,
Starbucks Corp. (SBUX) , Altria Group Inc. (MO) , Nasdaq OMX Group
Inc. (NDAQ) , Eli Lilly & Co. (LLY) , and General Motors Co.
(GM.XX) on Thursday; with Moody's Corp. (MCO), Colgate-Palmolive
Co. (CL) , Whirlpool Corp. (WHR) , and Ford Motor Co. (F) on
Friday.
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