By Wallace Witkowski, MarketWatch
SAN FRANCISCO (MarketWatch) -- Halfway through fourth-quarter
earnings season, U.S. stocks are coming off their worst January in
years, sending the message to Corporate America that par for the
course isn't good enough after the run-up in stock prices over the
past year.
The Dow Jones Industrial Average (DJI) ended the past week down
1.9%, capping a monthly decline of more than 5%, its worst January
since 2009, when it fell 8.8%. Likewise, the S&P 500 Index
(SPX) finished the month down 3.6%, its worst January since 2010,
when it fell 3.7%. Finally, the Nasdaq Composite Index (RIXF)
finished down 1.7% for the month for its worst January since 2010,
when it dropped 5.4%.
Declining emerging-markets currencies such as the Turkish lira
and the South African rand, coupled with a contraction in Chinese
manufacturing, weighed heavily on markets as the Federal Reserve
pushed forward with its tapering of monthly asset purchases this
past week. All that uncertainty, along with the S&P 500's 30%
gain in 2013, has raised investor expectations about quarterly
earnings results.
"Investors are like children: If you tell them you're bringing
home a puppy, you better have a puppy when you get home," said
Nicholas Colas, chief market strategist at ConvergEx.
Nowhere was that more apparent than with Amazon.com Inc.'s
(AMZN) results this past week. Amazon had promised a
"record-setting" holiday season, but earnings and sales fell short
of the Wall Street consensus. Shares of Amazon dropped 11% on
Friday, the following day, triggering a Nasdaq short-sale
restriction.
It doesn't matter that profit warnings reached record levels
going into fourth-quarter earnings season; expectations across the
board are much higher this year compared with last year given that
"all the good news" has already been baked into stock valuations,
Colas said. It's been a fairly lackluster earnings season, and
that's not enough to keep stock prices up, he said.
Also keep in mind that investors have been looking for a
correction for a long time, said Robert Pavlik, chief market
strategist at Banyan Partners. Earnings season has been more or
less as expected, so investors have been looking for a convenient
trigger for a selloff.
"The bottom line is that the market is not even fixed on
earnings season: It's fixed on the emerging-markets issue," Pavlik
said. "It's as though earnings have become secondary in this
period."
With that in mind, Pavlik expects emerging-markets jitters to
run their course, he said, and bottom out soon. After that, he
expects bargain-hunters to make their move and earnings will come
back into play, he said.
Consider the Super Bowl the earnings-season halftime show
So far, half of the S&P 500 has reported results this
earnings season. Of the companies that have reported, 74% have
topped Wall Street profit estimates; that's above the one-year
average of 71% and the four-year average of 73%, according to John
Butters, senior earnings analyst at FactSet. Earnings have been
about 3.6% above expectations, compared with a one-year average of
3.3% above targets and a four-year average of 5.8% above Wall
Street estimates.
On the revenue side of things, a higher-than-average number of
companies have beaten expectations, but, when taken as a whole,
revenue has actually come in just below expectations. About 67% of
companies reported sales above the Wall Street consensus, compared
with the one-year average of 54% and the four-year average of 59%,
according to FactSet data. When taken together, however, reported
sales from companies on the S&P 500 are 0.1% below
expectations, whereas the one-year average is 0.4% above and the
four-year average is 0.6% above, Butters said.
This week two of the 30 components of the Dow Jones Industrial
Average and just under a fifth of the S&P 500 are slated to
report earnings, with financial companies, health-care related
stocks and consumer-driven stocks in the spotlight.
Not only will Dow components Walt Disney Co. (DIS) and Merck
& Co. (MRK) report quarterly results on Wednesday, but Twitter
Inc. (TWTR) will post its first earnings report since going public
late last year. Shares of Twitter finished the week higher, caught
in the updraft of Facebook Inc.'s (FB) strong results.
Insurers such as Aflac Inc. (AFL), Allstate Corp.(ALL), Aetna
Inc. (AET), Cigna Corp.(CI) and Prudential Financial Inc. (PRU)
will also report, along with exchange operators Nasdaq OMX Group
Inc. (NDAQ) and CME Group Inc. (CME).
Following last week's data showing that consumer spending rose
in December while consumer sentiment declined in January,
consumer-driven stocks will likely fall under increased
scrutiny.
In addition to Disney, fellow media companies Time Warner
Inc.(TWX), MarketWatch parent News Corp. (NWSA)(NWS), 21st Century
Fox Inc. (NWS)(NWSA) and Gannett Co. (GCI) are set to report
results. Other notable consumer-discretionary companies reporting
include General Motors Co. (GM.XX), Expedia Inc. (EXPE) and Yum
Brands Inc. (YUM). Consumer-staples companies reporting results
include Archer Daniels Midland Co. (ADM), Kellogg Co. (K) and
Philip Morris International Inc. (PM).
Even with high-profile profit warnings from companies like
Wal-Mart Stores Inc. (WMT) this past week, the percentage of
companies issuing earnings guidance below the Wall Street consensus
has actually declined from the previous earnings season. Of the 54
companies that have given guidance for the first quarter so far,
44, or 81%, have guided below the consensus Wall Street view,
according to FactSet's Butters. While that's above the five-year
average of 64%, it's still below the 84% doing the same at this
time last earnings season.
Long-cycle factors come into play
As high-frequency trading grows and investors pan the deluge of
market data and news for some edge in trading, longer-cycle issues
like sustainable economic growth and inflation are going to have
more of a say in stock valuations than quarterly earnings reports
going forward, ConvergEx's Colas said. That also means more
volatility in the markets, especially as easing measures are
removed.
Even a fairly decent rise in fourth-quarter GDP of 3.2%, which
helped stocks close higher Thursday, didn't hold sway into Friday,
but with the third quarter's GDP gain of 4.1%, it's that sort of
consistent growth that will have more and more influence on
stocks.
"Economic growth is the most important factor right now --
emerging markets have made that clear," Colas said, adding that the
primary long-term driver for global growth has to be the U.S.
economy.
"GDP growth is going to be the most critical single factor,"
Colas said, with an emphasis on how that growth translates into job
creation, not just in 2014 but in 2015 and 2016 and onward.
With that in mind, January jobs data and the unemployment rate
come out Friday. Economists polled by MarketWatch expect an
addition of 185,000 jobs and a steady unemployment rate of
6.7%.
Other data on tap in the coming week include the ISM
manufacturing report on Monday, with services data on Wednesday and
December factory-orders data on Tuesday.
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