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Can earnings reverse Wall Street downturn?

Friday marked the Dow Jones industrial average’s biggest drop since May 2003. It will take a string of positive earnings reports and forecasts to get the market out of last week’s funk. Some aren't sure earnings will make a big difference.
/ Source: The Associated Press

First-quarter earnings season can’t arrive soon enough for Wall Street.

Besieged by disturbing data on the economy and inflation — and hurt by disappointing earnings in the technology sector — the markets saw their worst week since August, with Friday marking the Dow Jones industrial average’s biggest drop since May 19, 2003.

As a result, investors are desperate for good news, and plenty of it. It will take a nearly unbroken string of positive earnings reports and forecasts to get the market out of last week’s funk.

Even then, however, any move higher could be relatively short lived. The economy is still expected to slow considerably going into the summer, and it will be more difficult for corporate America to keep up earnings growth if people end up spending less due to oil, inflation or a combination of both.

Earnings: ‘Short-term boost at best’
Long-term, the solution may be to have the Federal Reserve unequivocally state that it is done raising interest rates, possibly as early as May’s meeting. That’s when the policy-making body is expected to hike the short-term rate to 3 percent, the eighth quarter percentage point raise since last summer.

“Earnings are only going to give us a short-term boost at best,” said Joseph Keating, chief investment officer at AmSouth Asset Management. “If the Fed can get out of the way, or at least acknowledge that the economy is downshifting, that might generate enough buying interest to set the stage for a longer-term recovery.”

There’s a lot to recover from. The Dow tumbled 420 points last week as worries of an economic slowdown, higher interest rates and weak earnings to start the first-quarter earnings season prompted the heaviest selling of the year. For the week, the Dow lost 3.57 percent, the Standard & Poor’s 500 was down 3.27 percent, and the Nasdaq composite index tumbled 4.56 percent.

Back-to-back Labor Dept. reports
Concerns about inflation will be either assuaged or exacerbated in the week ahead as the Labor Department releases its two key pricing reports back to back.

Tuesday brings the Producer Price Index, which measures wholesale costs. The PPI expected to rise 0.6 percent in March after a 0.4 percent increase in February. With volatile food and energy costs excluded, so-called core PPI is expected to climb just 0.2 percent, up from 0.1 percent in February.

The Consumer Price Index, which measures the prices individuals pay on the retail level, follows on Wednesday. The CPI for March is expected to remain steady with a 0.4 percent increase, but core CPI is expect to climb just 0.2 percent, down from February’s 0.3 percent.

Given Wall Street’s focus on inflation and the Federal Reserve’s likely response with interest rates, these two reports will be watched very closely, and the market’s reaction is likely to be pronounced.

Stocks to watch: Caterpillar, Intel
First-quarter earnings season will flow in during the week ahead. A few companies will stand out as investors look to their earnings for clues about the course of the economy.

Caterpillar Inc. has been one of the Dow’s strongest performers over the last year, but has fallen 16.5 percent since closing at its 52-week high on March 4 as investors worried that high raw material costs and climbing oil prices would eat into the heavy equipment maker’s profits. The company is expected to post earnings of $1.39 per share, up from $1.16 per share a year ago, when it reports before Wednesday’s trading session.

With IBM Corp. reporting disappointing earnings last Thursday, investors will turn to fellow Dow component Intel Corp. to see if IBM’s woes are an isolated incident or symptomatic of techs as a whole. Intel is expected to post a profit of 30 cents per share, up from 28 cents per share a year ago, when it reports earnings Tuesday afternoon. Intel closed Friday at $22.12, 23.4 percent off its 52-week high of $29.01 set on June 8, 2004.

Others: J&J, GM, Ford, Google
The healthcare sector was the only sector to post a modest gain Friday, thanks to enthusiasm over pharmaceutical companies’ performance. The sector’s biggest name, Johnson & Johnson, reports its earnings Tuesday morning and is expected to earn 91 cents per share, up from 83 cents a year ago. The stock reached an all-time high of $69.99 on Friday before closing at $69.40, up 36.6 percent from its 52-week low of $50.81 set on April 12, 2004.

Among other top companies releasing earnings reports this week, embattled General Motors Corp. is expected to post a steep loss on Tuesday, while rival Ford Motor Co. reports earnings on Wednesday and is expected to see a sharp decline in profits. Rival Internet companies Yahoo! Inc. and Google Inc., the Coca-Cola Co., JP Morgan Chase & Co. Inc., and eBay Inc. are also expected to issue their results.