By Wallace Witkowski, MarketWatch
SAN FRANCISCO (MarketWatch) -- As earnings season ramps up in
the coming week, investors will be looking closer at quarterly
corporate metrics as a way of filling in the gaps from a lack of
government data over the past two weeks.
Stocks rebounded late last week on signs of a thaw in the
partial government shutdown and debt-limit deadlock, but talks
stalled over the weekend. The Dow Jones Industrial Average (DJI)
finished up 1.1% for the week and the S&P 500 Index (SPX)
gained 0.8%.
The Nasdaq Composite Index (RIXF), which had been down as much
as 4% for the week, finished the week down 0.4%.
The new focus was on discussions in the Senate between Harry
Reid, the Democratic majority leader, and Mitch McConnell, the
Republican minority leader.
That followed President Barack Obama's rejection Saturday of the
latest proposal from House Republicans, and a failed attempt by
Senate Democrats to raise the borrowing limit.
"The only story right now is D.C.," said Brad McMillan, chief
investment officer for Commonwealth Financial, which has more than
$71 billion under management. D.C. remains a focus not just because
of the disruption being caused by political wrangling, but the
shutdown has also choked off a prime source of economic data.
After two weeks of a partial government shutdown, several
indicators of economic health have been . The lack of government
statistics will shift even more scrutiny to earnings reports.
One recent example of how the shutdown wormed its way into
earnings was a profit warning from Silicon Graphics International
Corp. (SGI). SGI cut its outlook, citing lost revenue from
contracts that were frozen late in the September-ending quarter in
the run-up to the shutdown. Shares of the large-scale computing
company dropped nearly 10% on Friday following the late Thursday
warning.
With nine Dow components and more than 60 companies on the
S&P 500 reporting in the coming week, expect data-hungry
investors to devour those reports for clues on where the economy is
heading.
"One of the things that worries me is not getting statistics,"
McMillan said. "This makes people worry especially if financials
[earnings] are coming in weaker than expected."
Financial earnings figure heavily in the coming week with
reports from Dow components American Express Co. (AXP) and Goldman
Sachs Group Inc. (GS), along with reports from Citigroup Inc. (C),
Bank of America Corp. (BAC) and Morgan Stanley (MS).
While adjusted earnings from J.P. Morgan Chase & Co. (JPM)
and Wells Fargo & Co. (WFC) cleared consensus levels on Friday,
J.P. Morgan's report was marred by more than $9 billion in
litigation expenses, while mortgage banking results -- Wells
Fargo's leading business -- came in weaker than expected.
That weakness in mortgages could signal a reluctant consumer in
the wake of economic uncertainty, much in the way growth was
stymied just before the fiscal cliff last year. On Friday, a report
showed consumer-sentiment levels at their lowest since January.
While banks will be taking center stage on earnings, a number of
consumer-focused companies will also be reporting. In that area,
some of the big earnings reports will be coming from Coca-Cola Co.
(KO), Johnson & Johnson Inc. (JNJ), PepsiCo Inc. (PEP),
UnitedHealth Group Inc. (UNH), Verizon Communications Inc. (VZ)and
Philip Morris International Inc. (PM).
"Consumer discretionary earnings will be an interesting
bellwether on what's been driving growth," McMillan said. Companies
specific to the consumer discretionary sector reporting in the
coming week include Chipotle Mexican Grill Inc. (CMG), Mattel Inc.
(MAT), Interpublic Group of Cos. (IPG) and Omnicom Group Inc.
(OMC).
One piece of data that concerns McMillan, which came out in the
past week, was disappointing September sales data from Gap Inc.
(GPS). "That's not a positive sign," he said. "I wonder if it
signals if people are pulling back. Consumer confidence is down,
not as much as thought, but Gap results worry me." Gap shares fell
nearly 7% on Friday.
So far, with 31 S&P 500 companies having already reported
earnings, the blended earnings growth rate stands at 0.8% for the
third quarter, according to John Butters, senior earnings analyst
at FactSet. At the end of September, the expected earnings growth
rate was at 3.1%, more than half of what was expected at the
beginning of that quarter.
Of the 110 companies on the index that have issued earnings
guidance for the quarter, 91 of them, or nearly 83%, are guiding
below the Wall Street consensus, the highest negative outlook
percentage since FactSet began tracking the numbers in 2006.
Other notable earnings fall toward the tech end of the spectrum
with reports from Yahoo Inc. (YHOO), Intel Corp. (INTC),
International Business Machines Corp. (IBM), eBay Inc. (EBAY) and
Google Inc. (GOOG).
Industrials also play a large role in the coming week with
Honeywell International Inc. (HON), Textron Inc. (TXT), CSX Corp.
(CSX), Union Pacific Corp. (UNP) and General Electric Co. (GE)
reporting.
In a recent Goldman Sachs report, the firm picked 20 stocks that
are expected to drive revenue growth in the third quarter.
Companies from that list reporting in the coming week are
UnitedHealth, Google and Verizon.
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