Earnings likely to determine stock rally’s future
NEW YORK — The stock market’s bulls are slowing their charge, and upcoming earnings reports will determine whether they keep going forward or just stop.
A two-week slump in response to disappointing economic numbers has investors asking whether the market’s powerful rally is fading on what would be the start of its eighth month. Analysts have been calling for a break in the ferocious advance, but now that it’s here, even many who expect further gains are adopting healthy caution.
This year’s rally has lifted major stock indexes more than 50 percent from 12-year lows on March 9 and pumped new life into beaten-down investment accounts. Now, though, questions about whether the gains are justified are more urgent because stocks are worth far more than they were only months ago. The market jumped 15 percent in the July-September period.
The economic reports of the past two weeks are stirring concern that investors have been too quick to bet on a recovery. The government said Friday that employers cut more jobs in September than in August. Other recent reports on everything from factory orders to the mood of consumers have brought reminders of the economy’s troubles. The Dow Jones industrial average is down 3.4 percent in two weeks.
No one expected a seamless recovery but the string of lackluster data has come as investors have little else to go on. Reports on corporate profits, which are the biggest drivers of the stock market, will only start trickling in this week.
The third-quarter reports could give investors a better sense of whether companies managed to bring in more revenue to produce earnings growth or whether they again resorted to steep cost-cutting to boost their bottom lines as with the April-June period.
Analysts and investors want to see revenue growth because cost-cutting can only be taken so far.
Aluminum producer Alcoa Inc., PepsiCo Inc. and Marriott International Inc. are slated to report during the week as is Yum Brands Inc., the parent of the Pizza Hut, Taco Bell and KFC fast-food chains.
Some analysts are questioning whether the latest lull in stocks is similar to the 7 percent slide the market endured from mid-June to mid-July before companies reported earnings that topped modest expectations.
“The market sold off into earnings season last quarter, then we had a big head of steam,” said Stuart Schweitzer, global markets strategist at J.P. Morgan’s Private Bank in New York.
He said companies are still relying on cost-cutting, a point underscored by the Labor Department’s report Friday that employers cut 263,000 jobs last month. That was more than the 201,000 cuts made in August and well above economists’ forecasts.
Investors dumped stocks ahead of the report amid worries that the swelling ranks of the unemployed would make it harder for the economy to strengthen. Schweitzer noted that the cuts, though painful, might still give a short-term boost to the market by allowing companies to post stronger profits.
“The severe job cuts that we’ve had set companies up for positive earnings surprises and stronger reports are necessary to encourage firms to stop firing and starting hiring people back,” Schweitzer said.
But he cautioned that the market’s rally will start to unravel if job losses continue.
“Cost cutting can work in the short run to support profits and share prices but in the long run unless we go from cost-cutting to rehiring, then the shortfall of demand will be the undoing of this market,” Schweitzer said.
Earnings are key but some analysts think the market will go higher because so many investors have missed the rally that they’ll buy into the dips.
Keith Goddard, manager of the Capital Advisors Growth Fund in Tulsa, Okla., welcomes the drop as a chance to move into stocks he likes.
“A pullback would be great from our perspective. We’d like to see it and I don’t think we’re alone at all,” he said.
Still, Goddard remains cautious and expects companies will have a harder time impressing investors just by increasing earnings per share.
“Expectations have gotten a lot further along so just beating by a penny may not be enough anymore whereas it was in July,” he said.
Investors have been counting on improvement. The Standard & Poor’s 500 index, which is the basis for many mutual funds, is up 51.4 percent since March even after sliding 3.9 percent from its recent closing high.
Beyond earnings, investors will have a light economic calendar this week.
The Institute for Supply Management’s service index, which covers businesses including hospitals, retailers and financial services firms, is expected Monday. The service index has fallen for the past 11 months. Last week, the group’s disappointing report on manufacturing helped drag down the market.
Reports are due later in the week on wholesale inventories, consumer credit and the nation’s trade balance.
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