Earnings come under spotlight

Investment banking gains are likely to lift financials. (REUTERS)

Profits from top US technology companies such as IBM and financial companies such as Goldman Sachs Group this week could help stocks gain as long as investors see room for more profit growth.

Stronger-than-expected results late on Thursday from tech bellwether Intel failed to excite investors on Friday, while steep loan losses reported by JPMorgan Chase & Company dragged down the market.

The benchmark Standard & Poor's 500 index rose 23.5 per cent last year, with information technology the top-performing sector. It jumped 60 per cent, raising questions about whether the sector may have become too expensive.

"It's all about how fast they can grow earnings to catch up to those valuations," said Jeff Kleintop, Chief Market Strategist at LPL Financial in Boston. "This is a business spending-led recovery rather than consumer recovery ... so I think earnings growth will remain above average and justify those valuations."

Fourth-quarter results are expected to show a sharp improvement compared with 2008's last quarter, when the economic downturn took a heavy toll on corporate profits.

S&P 500 earnings for the quarter are forecast up 186 per cent versus a year ago, according to Thomson Reuters estimates. It would be the first quarter that S&P 500 company earnings grew year over year since the second quarter of 2007. Next week the earnings period accelerates, with some 57 S&P 500 companies reporting.

International Business Machines is scheduled to post results on Tuesday while Google is expected on Thursday. Among financials, Goldman Sachs is expected on Thursday, while Bank of America and Morgan Stanley should report on Wednesday.

For the second week of the new year, the three major indexes lost ground. The Dow Jones industrial average was down 0.1 per cent, while the S&P was down 0.8 per cent and Nasdaq was down 1.3 per cent.

The S&P 500 is still up 68 per cent since its early March lows, largely because of stronger-than-expected earnings and economic data.

On the economic front, data that could influence stocks next week includes reports on housing starts, producer prices and leading indicators.

Data on December housing starts, expected on Wednesday, is forecast to show 580,000 new units from 574,000 in November. More than 70 per cent of companies beat estimates in recent reporting periods, and investors are eager to see if the fourth-quarter will produce similar results. The last quarter of 2008 was the worst earnings period in the history of the index.

"I think we're going to get decent numbers relative to estimates," said Fred Dickson, market strategist at DA Davidson &Company in Lake Oswego, Oregon. "Valuations have gone up, but so have earnings."

Intel, which fell 3.2 per cent to $20.80 on Friday, "had such a good run on the margin front that I think a lot of people are a little bit leery that there's going to be any further improvement in margins," said Owen Fitzpatrick, head of US Equity Group, Deutsche Bank Private Wealth Management.

IBM shares have risen almost 60 per cent in the past year as the company cut costs and changed its business mix. Analysts expect the company to report fourth-quarter revenue of about $27 billion (Dh99.17) and profit per share of $3.47 versus $3.27 a year earlier.

Financials, which were up 14.8 per cent as an S&P sector last year, could benefit from gains in investment banking and other factors, said Kleintop.

"Financials still remain the sore spot in the market. If financials are going down, the whole market is going down," he said.

Financials, materials and consumer discretionary companies are expected to have the highest earnings growth for the fourth quarter, Thomson Reuters estimates showed. Energy and industrials are expected to have the lowest.

Also set to report next week: General Electric, McDonald's Corp and American Express.


The author is a columnist with Reuters

 

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