Banks will hog the spotlight in the first big week for this quarter's earnings period as investors attempt to discern whether the surprising improvement in earnings in the first quarter continued through the second quarter of the year.
Analysts are not forecasting a replay of the first quarter, when stronger-than-expected results from financial companies sparked a rally in the sector and by extension, the rest of the market, that reached its apex in early June before fizzling out.
Earnings for the financial sector, as well as the rest of the S&P, are expected to have declined in the most recent quarter, and investors question whether companies will show enough improvements to warrant further gains in stocks.
Estimates for the S&P 500 as a whole show a decline of 36 percent in second-quarter earnings compared with a year ago, according to Thomson Reuters data. Analysts are looking forward to results to see if companies are feeling more optimistic about their businesses for the second half of the year.
Among the blue-chip financial names reporting this week are Bank of America, Citigroup, Goldman Sachs and JPMorgan Chase, along with tech mainstays Google Inc ,International Business Machines and Intel, as well as General Electric Co.
Given where we were last quarter, I would be surprised if we see as much positive news from banks, said Owen Fitzpatrick, head of the U.S. Equity Group at Deutsche Bank Private Wealth Management, in New York.
(But) I don't think there are a lot of concerns around financial earnings in general, he said. We're beyond the write-offs now to a large extent, and that eventually will be more of a positive for financials.
Second-quarter earnings for financial companies are projected to have fallen 55 percent from a year ago, compared with a decline of 63 percent in the first quarter, according to Thomson Reuters' data.
In one sign of investor focus on the financial sector, stocks jumped more than 1 percent on Monday after prominent banking analyst Meredith Whitney upgraded Goldman Sachs Group Inc to buy and said shares of Bank of America Corp were the cheapest among big banks relative to tangible book value. Both stocks climbed more than 5 percent.
Expectations that earnings might be strong enough to provide a further lift to stocks dampened somewhat last week after Chevron Corp, in an interim report on Thursday, warned that any benefit from higher oil prices would be mostly offset by the weakened dollar. Oil futures gained more than 50 percent in the second quarter.
However, aluminum producer Alcoa Inc last week reported a smaller-than-expected loss, and more reports that show companies surpassing estimates would go a long way toward improving investor sentiment.
According to Bespoke Investment Group, 62 percent of S&P 500 companies exceeded estimates in the first quarter, the first improvement in that figure since the first quarter of 2007. More of that may be needed to inspire investors.
We're guardedly optimistic about the earnings season. Companies have fairly low expectations, and we think the economy wasn't as dire as it seemed going into the quarter, said David Katz, chief investment officer at Matrix Asset Advisors.
We think Chevron's weakness will be the exception to the rule, and that the season will be more like Alcoa's results than Chevron's. We're looking for Chevron to be a one-off event, not something that sets a tone.
The stock market gained as much as 40 percent from March through May, but stocks have been lackluster since then, with the Dow Jones industrial average .DJI and Standard & Poor's 500 index .SPX falling for the fourth week in a row last week.
Investors in particular will be looking for evidence or upbeat comments from companies that suggest the economy is rebounding, analysts said.
But even if companies defy projections, that might not be enough to help stocks.
Thomson Reuters' data shows that all 10 S&P sectors are expected to show year-over-year earnings declines, with materials, energy, financials and industrials the sectors with the weakest expected earnings growth for the quarter.
I don't think earnings are probably going to be enough to break us out of this trading range, said Joseph Battipaglia, market strategist at Stifel Nicolaus, in Yardley, Pennsylvania.