U.S. stocks could be in for a bumpy ride this week as three Dow components kick off the quarterly earnings reporting season, with investors clamoring for reassurances on future profits.
While the latest earnings are widely expected to show a sharp improvement compared with the abysmal 2008 fourth quarter, the stock market could still be in for choppiness if company reports do not point to improved demand.
Aluminum company Alcoa Inc
Chipmaker Intel Corp
The quality of the earnings, as well as company outlooks, will be closely scrutinized to determine if the optimism that has driven the S&P 500 <.SPX> stock index to 15-month highs is warranted.
STRONG FIRST WEEK OF YEAR
For the first week of the new year, the Dow rose 1.8 percent, the S&P 500 climbed 2.7 percent and the Nasdaq shot up 2 percent. The S&P 500 has risen 69 percent since U.S. stocks hit a bottom in early March.
Whether companies can give a clear picture of improving prospects will be a major concern for investors, a strategist said.
Has visibility picked up for 2010? That's going to be more of a driver going forward, said Mike O'Rourke, chief market strategist at BTIG LLC, an institutional brokerage firm, in New York. I think companies are still going to be cautious with their guidance and their outlooks.
Investors also will watch out for economic data and could be hit with surprises, such as Friday's weaker-than-expected Labor Department report on December nonfarm payrolls.
We may be on the road to recovery, but we need to prepare for some potholes, said John Lynch, managing director and chief market analyst at Charlotte, North Carolina-based Evergreen Investments, with more than $150 billion under management.
The U.S. Federal Reserve is set to release its Beige Book on Wednesday, an anecdotal snapshot of regional economic conditions.
The government's report on December retail sales is due out on Thursday, along with data on December import prices and weekly jobless claims. December industrial production data and the Reuters/University of Michigan Surveys of Consumers and the December Consumer Price Index are due out on Friday. For a full economic diary, see
SIGNS OF IMPROVEMENT
I would really need to see fundamental justification in the first half of this year that we've got a floor in housing; a ceiling in the unemployment rate; the consumer starts to spend on durable goods and businesses are investing, not only in chips and software, but plant and equipment, said Lynch.
Signs of renewed vigor in profitability should give equities more upside, and some analysts even see the possibility of the S&P 500 heading toward 1,200, a key psychological level.
On Friday, U.S. stocks overcame early losses after the nonfarm payrolls report to end higher as investors bet that the larger trend was for labor market improvement.
According to Thomson Reuters data, S&P 500 companies are expected to post earnings of $15.80 a share for the fourth quarter after losing money for the same period a year ago. Analysts expect cost-cutting to provide a further underpinning to the bottom line, but revenue is the wild card, and some are pessimistic.
Topline growth is not going to be there because demand has shrunk so severely and will continue to shrink, said Keith Springer, president of Capital Financial Advisory Services in Sacramento, California.
A positive fourth quarter would mark the first quarter that S&P 500 company earnings grew year over year since the second quarter of 2007. The 2008 fourth quarter was the worst earnings quarter in the history of the S&P 500 index.
Alcoa is expected to post a small fourth-quarter profit, but optimism is tempered by concern over aluminum prices and how much the auto and aerospace industries rebounded from the recession. ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ For a graphic on Alcoa's earnings, click on: http://link.reuters.com/qat32h
Chipmaker Intel is expected to earn 40 cents a share, according to Reuters data, based on 23 estimates, on revenue of $10.15 billion.
The December retail sales should provide investors with clues about the extent of consumer spending in the just-ended holiday shopping season. According to a Reuters poll of economists, retail sales are forecast to show an increase of 0.5 percent after a 1.3 percent gain in November.
Excluding autos, sales are seen rising 0.3 percent after an increase of 1.2 percent in the prior month.
(Reporting by Ellis Mnyandu; Editing by Kenneth Barry)
(Wall St Week Ahead runs weekly)