New York Correspondent
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INVESTORS, backed by a wave of encouraging earnings reports and economic news, roared back into US stocks with a vengeance last week after a losing streak lasting nearly five weeks.
But the almost double-digit gains have led Wall Street analysts to believe the stock market will need to see more of the same, if not better, wave of second-quarter corporate earnings reports.
'Last week investors reacted strongly to companies' ability to beat reduced expectations, and with the economic data looking like it's improving, Wall Street is looking forward to seeing a rebound for corporate profitability by the end of the year,' observed James Awad, managing partner at Mercury Asset Management.
Indeed the rally took off after a batch of strong earnings - from the likes of Goldman Sachs, JPMorgan Chase and Intel - and surprisingly encouraging data on the US housing market to produce the best week for Wall Street in several months, reversing the negativity over the economy that has weighed heavily on investors recently.
Nearly three-quarters of the 55 companies in the S&P 500 Index that have reported earnings so far have beaten analysts' expectations. The key, however, is the extent to which companies are beating the estimates and the big name companies that are doing so: In the aggregate, companies are reporting earnings that are 11.2 per cent above estimates, according to earnings tracker Thomson Reuters. Goldman Sachs, JPMorgan Chase and Bank of America all reported earnings that were 18 per cent or more above estimates.
'We're starting to see investors feel like they can measure the bottom and when we'll hit it, and look over the valley to better times. The question for the short term is whether the market has much more room for upside from here after such a big and fast rally until we get proof that the economy is actually on the mend rather than just not as sick,' Mr Awad cautioned.
Some analysts think last week's buying frenzy was as good as it's going to get for a while.
'I expect a repeat of what happened the last time we had a burst of enthusiasm like last week's, at the end of May,' said David Rosenberg, chief market strategist at Gluskin Sheff. 'Investors started saying 'whoa, maybe we've gotten ahead of ourselves here' because suddenly stock valuations were looking kind of pricey given the extraordinary uncertainty that surrounds the outlook for the US economy six or seven months down the road. I think we're back to that point again,' he said.
Other analysts see further room for the bull to charge. 'The second quarter is shaping up to be very similar to the first quarter, in the way investors are reacting to companies' ability to beat admittedly low expectations,' said Cantor Fitzgerald's chief market strategist Marc Pado. 'But given the higher valuations for stocks we're working with now, I think we're going to need some more positive guidance for upcoming quarters along with the estimate-beating numbers to break through the high end of the market's trading range we're in now,' he said.
On Friday, even as the Dow floated just below the breakeven mark for much of the day, traders noted the positive 'feel' to the conviction-less action after four days of strong gains. And indeed, a burst of buying in the last minutes on word that beleaguered small business lender CIT was negotiating with Goldman Sachs and JP Morgan Chase for short-term financing to stave off bankruptcy pushed blue chips into positive territory for a fifth straight day, punctuating the stock market's best week since mid-March. The Dow inched ahead by 32 points, or 0.37 per cent, to close the week at 8,743.
Stocks in the S&P 500 finished a hair's width below even for the day, dipping 0.36 points or 0.04 per cent to close at 940. The Nasdaq Composite did almost the same but on the positive side, adding 1.6 points, or 0.08 per cent to close at 1,886.
For the week, the blue chip index tallied an impressive 7.3 per cent advance. The S&P 500 finished just behind with a nearly 7 per cent gain, while the Nasdaq forged ahead 7.4 per cent, putting the index up 8 per cent over the course of an eight session winning streak, it's best since September of 2006.
In the coming week, there will certainly be further opportunities for corporate America to wow investors. With 143 of the entire S&P 500, and 12 of the Dow Industrial's 30 companies due to report this week, and relatively little in the way of economic data, Wall Street will be keyed on profit reports.
This week belongs to the technology sector, particularly big tech, which bodes well for a continuation of the rally. 'Tech has been the strongest sector lately without a doubt. If we come out of this recession, the market will be led by technology companies,' said Mr Awad.
Texas Instruments kicks of the week for big tech today with its Q2 earnings. The Dow is heavily represented tomorrow, with Coca-Cola, United Technologies, DuPont, Caterpillar, and Merck scheduled to report. Tomorrow's tech names feature Advanced Micro Devices, Yahoo, Apple and Seagate. Continental Airlines, UAL and Southwest Air also report tomorrow.
On Wednesday, it's another big wave of major companies such as Morgan Stanley, Wells Fargo Bank of New York Mellon, eBay, Pfizer, Boeing and Pepsi. Microsoft is in the spotlight on Thursday, along with McDonald's, AT&T and 3M.
In terms of economic news, Wall Street will be most focused on Federal Reserve chairman Ben Bernanke's congressional testimony tomorrow and on on Wednesday.
Today will bring the June reading of the Conference's Board leading economic indicators. On Friday, the University of Michigan is scheduled to release the revised July reading of its consumer sentiment index.
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