Published April 6, 2009

WALL STREET INSIGHT
Q1 earnings next big test for a surging stock market

Analysts estimate profits will slump by 36.6%

By ANDREW MARKS
NEW YORK CORRESPONDENT
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AS Wall Street put to bed the first four-week run of gains for the US stock market in nearly a year and a half last Friday, market strategists were already debating whether the nascent bull run can stand up to the challenge of an especially grim first-quarter earnings reporting season.

'We've tested this rally several times over the last two weeks and it keeps standing up to the tests,' said Marc Pado, chief investment strategist at Cantor Fitzgerald. 'Every time we have a day like we did on Friday, where the market shrugs off bad news, investors refuse to turn cautious and take profits from big gains the day before. It adds to the bullish mindset,' he said.

'The first quarter will likely be a splash of cold water on what's become a bit of an overheated market the last week,' countered Art Hogan, chief investment strategist at Jeffries & Co. 'It's going to be hard to keep charging ahead in the face of these numbers,' he said.

Over the past four weeks, investors have been emboldened by major actions taken by the US government, ranging from the Federal Reserve's announcement that it was becoming a major player in the securities market by buying up US$1 trillion worth of Treasury notes and mortgage securities, to the Obama administration's plan to help get toxic assets off the major banks' balance sheets.

Last week's announcement on the suspension of mark-to-market accounting rules by the Financial Accounting Standards Board also gave those same beleaguered banks a huge boost in capital ratios.



Those moves, along with proclamations of relative health from some of the hardest-hit banks and tentative signs of improvement in the severely hit economy, have succeeded in banishing the fear and risk aversion that has dominated the stock market for most of 2009.

'Now that the stock market has had such a big bounce as fears that the financial system could truly implode and the economy could sink into a depression have receded, the question becomes what is the next leg of support for this rally,' observed Hugh Johnson, chief investment officer at Johnson Illington Advisors

The next big test is looming in the form of first-quarter corporate earnings reporting season.

Analysts estimate that earnings will sink by 36.6 per cent for the just-completed last quarter. Can the rally hold up against those kinds of dismal numbers?

'I think we can hold at this level during first-quarter earnings season,' predicted Mr Pado at the end of last week. 'I see the markets coming down a little in the coming week and into the next, until the banks' earnings are reported. I think we'll get positive announcements coming out of the banks, in terms of their improving capital reserves due to the accounting change and some being able to pay back TARP (Toxic Assets Relief Program) money early, which will offset the bad news from earnings,' he said.

The last few trading days of the rally have been defined by investors' willingness to look beyond the current numbers and see the potential of significant improvement in the months to come. 'The psychology in the market is that the first quarter is water under the bridge,' observed Ethan Harris, chief US economist at Barclay's.

On Friday, stocks continued to rally despite another awful, estimate-beating employment report. The Dow Jones Industrial Average gained almost 40 points, or 0.5 per cent, to end at 8,017.59, its first close above 8,000 since Feb 9. The S&P 500 climbed eight points or one per cent, reaching 842.50 at the closing bell. The Nasdaq composite added 19 points, or 1.2 per cent, to 1,621.87.

For the four-week period ended Friday, the Dow's advance came to 21.5 per cent, the blue-chip index's best four-week run since May 1933, when it gained 31 per cent.

While a 20 per cent gain 'officially' makes for a bull market, many Wall Street traders and analysts doubt the bear is done.

Whether the bear comes out of hiding over the next two weeks depends upon earnings and the outlook offered up for future quarters, traders said.

Alcoa's kicks off the earnings reporting season tomorrow. Bed, Bath and Beyond also reports tomorrow, followed on Wednesday by Family Dollar. Oil giant Chevron weighs in with its profit report on Thursday.

The economic calendar will feature one potential market mover - Wednesday's release of minutes from the Fed's last meeting. Consumer credit data is scheduled for release today.

Thursday will bring several reports on economic data, including trade figures, chain-store sales and the latest weekly jobless claims.

Another key event for the week, also on Wednesday, is the Securities and Exchange Commission (SEC) meeting to consider restoring the uptick rule which would allow short sales only when the last sale price of a stock was higher than the previous. Some investors believe the SEC's reversal of the rule in 2007 allowed short sellers to unfairly drive stock prices lower.

The week ahead could also bring announcements of changes to the closely followed Dow Jones Index. Analysts expect the ouster of Citigroup, Bank of America Corp and General Motors Corp.