Published March 30, 2009

WALL STREET INSIGHT
Investors face earnings reality check ahead

After 20% surge in 3 weeks, market turns wary as Q1 results season looms

By ANDREW MARKS
NEW YORK CORRESPONDENT
Email this article
Print article
Feedback

IN a year of historic events on Wall Street none has been enjoyed by investors nearly so much as the over 20 per cent rally that has taken place over the last three weeks.

After the bounce: 'We've run through most of the big positives, and now we have a month's worth of negatives to deal with - Q1 earnings' -- AFP

The surge, the largest three-week advance by the US stock market since 1938, has boosted investor psychology and raised hopes that the bear market has, if not ended, at least touched and moved firmly off the bottom.

By the end of last week it appeared that the boost of energy and optimism served up to the stock market by several events that brought some serious cash off the sidelines and into beaten down shares, and sent a host of short sellers scurrying for cover, might just be running out as the first quarter approaches its end in the next couple of trading sessions this week.

'When you look at what's occurred over the last few weeks, it's really been quite extraordinary and surprising,' said Jim Awad, managing director of Zephyr Asset Management. 'The stock market got exactly what it wanted, which was signs that rate of contraction in the economy is not getting worse plus Geithner's bank plan and the Fed taking aggressive action. Even given that and the oversold condition of the market it was an unexpectedly powerful bounce,' he said.

Now comes April and a major reality check as companies report first quarter earnings and investors think through the complexities of the Treasury's toxic asset plan. 'We have seen the lows and put them in the past, but I don't see how we make much progress from here,' said Mr Awad.

'Unless the market gets some kind of news or positive events like we've seen lately, I would not be surprised to see a moderate move down starting this week and continuing through the month as we work our way through earnings and outlooks,' he forecast.

Unfortunately, agreed most market strategists, more catalysts like Citigroup and Bank of America reporting they were profitable in the first two months of the year, which started the market on its bullish run, followed by the Federal Reserve's extraordinary announcement that it would buy up to US$1 trillion in Treasuries and mortgage securities, and then finally the delivery of a detailed plan by the government to get more than US$1 trillion in toxic mortgage assets off banks' books, is unlikely to push its way onto electronic tickers in coming weeks.

'We've run through most of the big positives that were on the horizon, and now we have a month's worth of negatives to deal with in the form of first quarter earnings, so yes, it will be hard to build on the rally,' said Larry Adam, chief investment strategist at Deutsche Bank Wealth Management.

'But given that the market has been pricing in horrible first quarter earnings results for some time now, I think we can maintain this higher trading range while we wait to see whether the economy can show us a few more signs of life, as we've been seeing lately,' he said.

On Friday, investors seemed to turn wary after a week - and a month - of huge advances, or at least be in need of a breather. The Dow Jones Industrial Average fell 148 points, or 1.9 per cent after Thursday's 3.9 per cent climb, to end at 7,776.18. The S&P 500 Index gave back 17 points, or 2 per cent, to end at 815.94, while the Nasdaq Composite Index slumped 41.8 points, or 2.6 per cent, giving up it's brief foray into positive territory for the year as it closed at 1,545.2.

Still, the week was a fine one for stocks, as the blue chip Dow index gained 6.8 per cent gain, the S&P 500 advanced 6.2 per cent and the Nasdaq rose 6 per cent.

If stocks are going to hold onto the ground they've gained in March, investors will have to shrug off what is shaping up to be one of the worst quarters ever for corporate America. Expected or not, the numbers almost beggar the imagination.

The estimated earnings growth rate for the S&P 500 for the first quarter is down to negative -35.6 per cent, with all 10 sectors in the S&P 500 expecting a year-over-year decline in earnings, the highest number of sectors recording negative growth since Thomson Reuters began tracking sector growth rates in 1998.

The consumer discretionary sector is expecting an earnings growth rate of negative-102 per cent, with department stores industry anticipating a growth rate of negative-139 per cent.

With Alcoa's report on April 7 marking the unofficial kick-off to first quarter earnings season, only a few S&P 500 companies will be reporting this week, including Research In Motion, Micron Technology, Monsanto and Rite Aid.

Besides earnings worries, the stock market will likely be swayed this week by the major summit of world leaders of the G-20 nations in London, where Wall Street will be on the lookout for signs of accord or at least cooperation in addressing the global financial crisis.

A host of key economic reports will also be in focus, especially in the wake of several estimate-beating reports, including housing and consumption data, that have encouraged some Wall Street economists that the economy is starting to find a bottom.

'It's a process, not a fixed line in the sand,' said Ethan Harris, chief US economist at Barclays. 'We've still got a ways to go in that process, but there are signs that decline is slowing, and I expect to see more data like that start trickling in.'

Fed chairman Ben Bernanke will be on investors' minds on Friday, when he speaks on the Fed's balance sheet at the Richmond Fed's Credit Symposium.