Wall Street looks to earnings reports

With the economic roster light this holiday-shortened week, Wall Street will turn its attention to quarterly earnings, as a handful of high-profile U.S. companies like Alcoa and General Electric hand in their profit scorecards for the first quarter of 2004.

After a stronger-than-expected report on the U.S. jobs market last week, which suggested the long-ailing labor market is in recovery mode, investors will be hoping that the first first-quarter earnings reports will show corporate America is also strengthening.

“Earnings will be the big driver for the market [this week] and expectations are pretty high,” said Peter Dunay, chief market strategist at New York brokerage Wall Street Access.

“If earnings do come in at the level they’re supposed to, and with this strong jobs report, you have to assume the market climbs from here, perhaps to the highs we saw in February,” Dunay added.

Last week, Wall Street’s benchmark Standard & Poor’s 500-stock index finished March barely changed, having seesawed its way through the month amid heightened terrorism fears after deadly train bombings in Madrid and growing tensions in Iraq following the killing of four American contractors.

After hitting their lows for the year in late March, stocks have risen sharply and they are now within striking distance of 2004 highs. For stocks to move higher still, investors will need to see companies deliver strong quarterly results and indicate that there is more good news to come in the months ahead, analysts note.

"We'll be hoping for in-line if not better numbers coming out of corporate America," said Jack Caffrey, equity strategist at J.P. Morgan Private Bank.

Investors will also fixate on "whether managements can offer some positive commentary with respect to what they're seeing in their own businesses that makes us think that we have some sustainability," Caffrey added.

After a fairly quiet earnings “confession” season — the period before earnings reporting season when companies let Wall Street know if their results will fall short of estimates — expectations are high for solid quarterly profit growth.

A consensus of Wall Street analysts polled by earnings research firm Thomson First Call predicts results for companies in the S&P 500 index will grow by 16.9 percent from the same quarter one year ago, mostly driven by strength in the basic materials, technology and transportation sectors.

By the end of earnings season, Thomson estimates earnings growth for the quarter will come in above 20 percent, recording a third straight quarter of robust growth and rising well above the long-term average for quarterly earnings.

Key in the quarter’s profit reports: evidence of top-line, or revenue growth, as it should indicate whether the economy is growing at a strong enough pace for companies to hire new workers, an important ingredient in a sustained economic recovery said Peter Dunay.

Earnings season will unofficially start after Tuesday’s close, when aluminum giant Alcoa, always the first member of the Dow Jones industrial average to report, delivers its quarterly results.

But the main earnings event of the week will come on Thursday, when fellow Dow component General Electric is due to report, said Dunay. GE is a diversified conglomerate and a proxy for the overall U.S. economy, he noted.

“If GE delivers a good earnings report, it could set the stage for a good rally,” Dunay said.

On the economic front this week, there will be just a few reports of note, including the Institute for Supply Management's survey of the non-manufacturing sector, and reports on consumer credit, import and export prices, wholesale inventories, and weekly jobless claims.

Analysts also say investors may continue to mull the long-term impact of last Friday’s stronger-than-expected March payrolls report, which showed U.S. employment grew at its fastest pace in four years as the economy created 308,000 jobs, more than three times the number Wall Street analysts had forecast.

Stock prices rose sharply and bonds fell after the report was released, as it appeared to indicate the nation's economic recovery is gathering steam. But many analysts were cautious, noting that more evidence of job growth is needed to validate the March jobs report.

“Weekly data show layoffs have abated, and now we’re seeing the labor market improve, but is it sustainable?” said Peter Dunay.

Wall Street is also worried that the jobs report means a rise in interest rates is now on the cards.

Investors are worried that the Federal Reserve may raise rates as soon as this summer to counteract economic strength. Higher interest rates could hurt companies in the financial and housing sectors because higher borrowing costs discourage consumers from buying new homes or from refinancing their mortgages.

U.S. financial markets will close Friday in observance of Good Friday.

Reuters contributed to this report