By Wallace Witkowski, MarketWatch
SAN FRANCISCO (MarketWatch) -- For stocks to stem their recent
bleeding, outlooks from heavy-hitters such as Google Inc., Intel
Corp. and International Business Machines Corp. will need to show
the economy is rebounding after a weather-stilted first
quarter.
Company forecasts for the second quarter will likely carry more
weight than actual first-quarter earnings results this season. Most
investors have already accepted that first-quarter earnings results
will be unimpressive due to severe winter weather during the
quarter, according to strategists.
"You can get a pass on the first quarter, but then the bar on
the second quarter goes up," said Brad McMillan, chief investment
officer for Commonwealth Financial. "It all keeps on coming down to
growth expectations."
U.S. stocks got clobbered this past week. The S&P 500 Index
(SPX) and the Nasdaq Composite Index (RIXF) both had their worst
weeks since mid-2012, falling 2.7% and 3.1%, respectively. The Dow
Jones Industrial Average (DJI) fell 2.4% for its worst week since
mid-March.
That's just in time for a ramping up of earnings season. During
the four-day trading week, which ends Thursday ahead of the Good
Friday holiday, nine Dow components report quarterly results. Those
Dow components include Coca-Cola Co. (KO), Johnson & Johnson
Inc. (JNJ), and Intel (INTC) on Tuesday; IBM (IBM) and American
Express Co. (AXP) on Wednesday; with UnitedHealth Group Inc. (UNH),
General Electric Co. (GE), Goldman Sachs Group Inc. (GS), and
DuPont (DD) on Thursday.
Also 52 S&P 500 components release results with significant
reports filling out the tech and financial sectors. Companies
include Google (GOOG)(GOOGL), Yahoo Inc. (YHOO), Bank of America
Corp. (BAC), Citigroup Inc. (C), Morgan Stanley (MS), and BlackRock
Inc. (BLK)
Financial results continue after Friday presented a diverging
tale of two banks with J.P. Morgan Chase & Co. (JPM) shares
falling on a miss and Wells Fargo & Co. (WFC) rising on an
earnings beat.
Citigroup earnings: here's what investors can expect
Wall Street's outlook for the first quarter is pretty bleak.
Then expectations get more optimistic. First-quarter earnings are
expected to decline 1.6% from the year-ago period, down from
forecasts of 4.3% growth in January, according to FactSet. Analysts
expect earnings growth of 7.7%, 11%, and 11% for the second, third,
and fourth quarters, respectively.
Projected declines, like the one expected for the most recent
quarter, usually don't pan out, notes John Butters, senior earnings
analyst at FactSet. Over the past 12 quarters, earnings have only
declined once in the three other instances where they were forecast
to decline, and have always fared better than expected, according
to Butters.
Both Dan Greenhaus at BTIG and analysts at Goldman Sachs have
forecast that first-quarter earnings are likely to grow more like
2%. In calculating the average "beat" on earnings over the past 12
quarters, Butters estimated earnings would likely grow 1.8% in the
first quarter.
"Investors may be willing to look through poor 1Q results
brought on by adverse weather conditions if managements offer
evidence of improving business activity," said Goldman Sachs in a
recent note.
"While guidance always skews negative, guidance provided in
recent quarters has been more negative than usual," Goldman Sachs
said. "Investors need to see a reversal of this trend in order to
dismiss poor 1Q results."
Show me the outlook
The Dow may be 3.7% off its recent record high, and the S&P
500 4.3% off its high, and the Nasdaq 8.5% off its recent high, but
those levels are still considered pricey by many investors if
companies don't start backing up their results with solid growth
and investment.
Manufacturing orders picked up in March, along with improved car
sales and factory orders, and that puts more pressure on companies
to spend more money on capital expenditures and growth. Bank of
America Merrill Lynch's Savita Subramanian said in a recent note
that "if companies signal they are spending on growth via capex and
R&D or even M&A, rather than returning cash, that would
bode well for corporate confidence and the overall health of the
economy, and could lift stocks, as companies spending on growth
have begun to outperform."
Big tech names reporting this week such as Google, IBM, and
Intel are seen by Commonwealth's McMillan more as broad bellwethers
for the economy, especially in the area of capital expenditures.
These companies in particular should be benefitting from a rise in
capital expenditure spending, so if their results are light, that
could indicate a red flag for the economy, he said.
The main reason why Brian Belski, chief investment strategists
at BMO Capital Markets, is still bullish on U.S. stocks long term
is that corporations have gone too long without capital
improvements, signalling a lot of pent-up spending. In a recent
note, Belski said the average age of corporate equipment and
software is at its most outdated levels in 15 years, and that while
capital spending has improved recently, it's still well below
historical averages compared with GDP.
Other earnings on deck
The most exposed sector this earnings season, however, will be
consumer-based stocks, particularly consumer staples,
Commonwealth's McMillan said.
In addition to Coca-Cola, consumer staples names reporting this
week include PepsiCo Inc. (PEP) and Phillip Morris International
Inc.(PM) , while consumer discretionary names include Mattel
Inc.(MAT) , Chipotle Mexican Grill Inc.(CMG) , and AutoNation Inc.
(AN)
Healthcare and medical earnings reports this week include Abbott
Laboratories(ABT), St. Jude Medical Inc.(STJ), and Baxter
International Inc. (BAX) .
Another heavily represented sector this week includes
industrials with reports from Union Pacific Corp. (UNP), CSX Corp.
(CSX), Kansas City Southern (KSU), Rockwell Collins Inc. (ROK),
Honeywell International Inc.(HON) , Danaher Corp.(DHR), and Snap-on
Inc. (SNA)
Expect weather to figure heavily in reports. Weather figured as
a prominent reason for hurting earnings results in 12 out of the 26
S&P 500 companies that have already reported first-quarter
results, according to FactSet's Butters. Also, 93 out of 111
S&P 500 companies, or 84%, have issued an earnings outlook that
fell below the Wall Street consensus at the time, according to
FactSet data.
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