Wall Street is expected to focus on a fresh barrage of quarterly profit reports this week, as earnings season continues apace. Analysts say investors will be hoping the market can shake off lingering concerns about the prospect of rising interest rates.
All told, 136 companies in the benchmark Standard and Poor’s 500-stock index — including six companies in the Dow Jones industrial average — will report earnings results in the week ahead as the torrid pace of earnings reporting season continues into a second week, albeit at a slightly less hectic pace than the week before.
Analysts say investors will be hoping the market’s response to the corporate earnings news, which as been mostly upbeat to date, will improve on last week’s muted reaction.
The main U.S. stock indices closed last week with slim gains, putting them just above their levels at the end of last year, despite a string of strong quarterly earnings reports from blue-chip companies like Caterpillar and Microsoft. (MSNBC is a Microsoft-NBC joint venture.)
Analysts said investors were preoccupied with congressional hearings earlier in the week in which Federal Reserve Chairman Alan Greenspan said America's economic recovery had good momentum and that record-low short-term interest rates would have to rise “at some point” to prevent inflation from taking off.
The potential for higher rates was a disappointment for the stock market, and it knocked the Dow industrial average down 123 points, or 1.2 percent, on Tuesday, as investors took Greenspan’s comments to mean rates will likely rise before the year is out.
As long as interest rates stay low, stock valuations will remain healthy noted Edgar Peters, chief investment officer at Boston-based PanAgora Asset Management. "When interest rates start rising, it won't take much more for stocks to become overvalued again," he added.
Higher interest rates can hurt stock prices because they increase companies' borrowing costs, potentially weakening corporate profits.
However, once the inevitability of higher interest rates is accepted, companies will enjoy the fruits of a booming economy and the stock market will see further gains according to analysts like Jeff Kleintop, chief investment strategist at PNC Advisors.
"Optimism from CEOs, in many cases heard for the first time since 1999, is bolstering investor confidence that corporate America can weather a series of rate hikes," Kleintop said.
Earnings news still stellar
The stock market may not be reacting to the upbeat corporate results quite yet, but this earnings season is shaping up to be another strong one, with a consensus of analysts polled by earnings research firm Thomson First Call predicting results for companies in the S&P 500 index will rise by 23.7 percent, up 3 percent from last week’s estimate.
“That’s a lot in one week,” remarked Ken Perkins, a research analyst at Thomson/First Call, attributing the robust rise to stronger-than-expected first-quarter earnings results last week from firms like Caterpillar, Ford and Motorola.
Over half of the companies in the S&P 500 index have now reported their quarterly results, and to date 78 percent of them have beaten earnings estimates — an outstanding number that is 20 percent above the long-term average, according to Perkins. Eleven percent of companies matchedg estimates, while another 11 percent missed them.
Another positive, notes Perkins, is that companies the S&P 500 index are reporting sturdy revenue growth, which is important because companies need to see revenue grow in order to expand their businesses and hire new workers, an important ingredient in an economic recovery. With results from about 300 companies already reported, revenue is up 12.5 percent from the same quarter a year ago — a figure not seen since early 2000, he said.
“That’s a pretty solid revenue growth number,” said Perkins. “And when you factor in the earnings estimates for those companies that have yet to report, revenue growth for the quarter is likely to be 9.7 percent. But as many companies will likely beat expectations, it will probably be closer to 11 percent.”
One cloud on the earnings horizon, Perkins adds, is an expected deceleration in corporate profit growth in the second half of 2004. “Later this year earnings comparisons will become difficult and we’ll likely be in a rising rate environment, which tends to dampen earnings,” he said, adding that interest rates are not expected to rise in a way that would threaten the economic recovery.
Solid GDP number seen
A handful of reports on the economy are expected this week, including data on new and existing home sales in March, the Conference Board's April consumer confidence survey and personal income and spending data for the month of March. But the economic agenda will be dominated by the government’s first take on first-quarter gross domestic product, or GDP, a measure of economic growth, which is due for release early Thursday.
Most Wall Street analysts expect to see a GDP reading of 5.0 percent on an annualized basis for the first quarter, compared with a 4.1 percent reading last quarter. Steve Stanley, an economist at RBS Greenwich Capital, thinks the number will be between 4.5 and 5 percent, but notes that next week most on Wall Street will be focused on two critically important economic events that come the following week.
On Tuesday, May 4, the Federal Reserve’s policy-setting committee will meet to decide on monetary policy, and the following Friday the government will release its April jobs report, which many economists hope will corroborate last month’s strong employment report, signaling that the economic recovery is still on track.
“The market has definitely priced in a Fed move in August, and I’m one of the few economists who thinks they will make their move in June,” Stanley said. “And the payrolls number is critical — if job growth peters out in April, then the whole economic situation changes dramatically.”