Get ready for the earningsIntel, Apple, Citigroup and GE lead the list of companies reporting 4Q results in the week ahead. Will they disappoint?NEW YORK (CNNMoney.com) -- With the Dow industrials standing at a record high, oil prices at multi-month lows and the economy chugging along at a better pace than what some had been expecting, it's hard to see what could upset stock investors. Maybe earnings?   
After a few scattered reports this week, next week brings the first significant wave of fourth-quarter earnings, with 43 of the S&P 500 companies set to release results. Intel (Charts), Apple (Charts), Citigroup (Charts), General Electric (Charts) are among the large, widely-traded U.S. companies due to report. (See chart for details.) Many individual company earnings released over the next month will impress, as has been the case in recent years. Yet, overall S&P 500 earnings growth in the quarter is expected to grow at the slowest rate in 4-1/2 years, according to a recent report from Standard & Poor's. Earnings are currently on track to grow less than 10 percent from a year ago, giving the S&P 500 index its first quarter of single-digit growth since the first quarter of 2002. While this factor isn't likely to throw a wrench into the rally, it is nonetheless a negative that investors don't seem to be paying attention to, some market watchers say. "For at least three years, analysts have been saying that earnings growth will slow and it hasn't really that much," said Dan Genter, president and CEO at RNC Genter Capital Management. "This year, it may really happen, and investors haven't fully digested that." The earnings and oil price connection Earnings are bound to slow because of tougher comparisons after several strong years, because the economy is slowing and oil company profit growth is set to do the same. Sustained higher global oil prices drove oil company profits higher over the last few years, with the energy sector leading all other major S&P sectors in earnings growth in 2004 and 2005. But crude oil prices have slumped more than 30 percent since last July. While that's been good for consumer spending, inflation and the stock market over the last six months, it hasn't been as good for oil companies. Energy sector earnings are expected to have fallen 10 percent in the fourth quarter, according to earnings tracker Thomson Financial/First Call. It will be the first quarter of earnings contraction for the sector since the third quarter of 2002, said Thomson research analyst John Butters. If the S&P 500's big earnings engine driver stalls, overall earnings are likely to slow also. Butters said that the materials and financial sectors are set to show the most growth in the fourth quarter. However, the materials sector is small, with financials "really driving the overall growth," Butters said. Strip out financials, and overall 4Q earnings would be on track to rise only 1.9 percent. Whether the broad slowdown in earnings growth will upset stock investors over the next month is unclear. "I think the 4Q earnings are only a factor if they miss by a lot," said Barry Hyman, equity strategist at EKN Financial Services. "We're used to earnings beating forecasts, that's the norm. If they don't, then there could be an issue." Eye on the economy, the Fed Recent economic reports have suggested that the economy was stronger in the fourth quarter than some had expected, although not so strong as to raise worries that the Federal Reserve would have to start raising interest rates again. After boosting a key short-term interest rate for more than two years, the Federal Reserve has held rates steady for the last four policy meetings. Stock investors are hoping that at whatever point the bankers make a move, the move is to cut. Bets that the bankers would cut as soon as the first quarter of 2007 have been thwarted by recent strong reports - including the December jobs report and last week's December retail sales news. Yet, questions still remain about the pace of economic growth and what it will mean for interest rates, for the inflation outlook and for earnings in the months ahead. As such, investors will continue to scour the economic reports for clues. Next week's standouts include December producer and consumer prices, December housing starts and building permits and manufacturing in the Northeast. On Wednesday, the Fed releases the "beige book," its periodic survey of economic activity. All financial markets are closed Monday in honor of the Martin Luther King Jr. Day. |
|
