(Repeats column published on Friday)
By Chuck Mikolajczak
NEW YORK, April 20 Earnings season shifts into
high gear this week, and with nearly one-third of S&P 500 names
set to post results, investors hope the news provides a catalyst
to buy stocks and leave the market's recent weakness in the
Several behemoths, including Apple, the largest U.S. company
by market value, as well as Microsoft, McDonald's and
AT&T, are due to report earnings.
They'll be accompanied by high fliers like Netflix and
Facebook, giving the first real cross-section of the state of
corporate America as temperatures rise across the country and
investors hope to put the cold weather behind them. Strategists
will also be looking for clues on how badly China's slowdown
hits U.S. corporate results.
The first batch of earnings came out as equities were
working their way through a selloff led by trading-crowd
favorites like Netflix and the biotech stocks. With the
late-week recovery, the hope is that the recent volatility has
ebbed. If poor results dominate next week's action, that could
reignite the selling.
"We are still off our highs, but we still remain in an
uptrend so it would not surprise me to see sideways action,"
said Andre Bakhos, managing director at Janlyn Capital LLC in
Bernardsville, New Jersey.
"If we were to have a set of earnings releases that were
well off expectations to the downside, that could create
hesitation in the market."
A few themes will dominate this week: The outlook for China,
the rotation to slower-growing stocks, and results from
high-flying trading favorites.
S&P 500 companies' first-quarter earnings are projected to
have increased 1.7 percent from a year ago, Thomson Reuters data
showed. The forecast is down sharply from the start of the year,
when profit growth was estimated at 6.5 percent, but has climbed
from a low of 0.6 percent reached on Wednesday.
That jump occurred despite notable disappointments from IBM
Corp and Google Inc. Even with those two
lackluster reports, equities still mostly rallied on Thursday.
The benchmark S&P index rose 2.7 percent for the
holiday-shortened week, helping the index recapture nearly all
of the declines suffered in the previous week. The U.S. stock
market was closed for Good Friday.
THE CHINA CHALLENGE
Investors eyeing the impact of China's troubles on corporate
America's bottom line will have a few spots to pick from,
including Apple, Qualcomm and Yum Brands
There have been warning signs, with IBM saying last week
that its disappointing quarterly revenue was due to worsening
sales in the world's second-largest economy and other emerging
markets. Earlier in the week, China reported growth came in at
its slowest pace in 18 months.
Qualcomm's revenue for its fiscal year ended Sept.
29, 2013, showed China accounted for nearly half of the
company's revenue. Options activity in Qualcomm has been
defensive in nature, with investors paying more money to hedge
against a fall than a rise in the stock's price.
But strategists at Goldman Sachs see this as a buying
opportunity, believing the options data shows investors are
overly concerned about the quarter.
Apple Inc also derives 13 percent of its sales from
China, according to Thomson Reuters data. The company was once a
favorite among momentum investors looking to capitalize on swift
price gains, but the stock dropped sharply from all-time highs
reached in late 2012. It has been mostly stuck in a range for
the last year.
StarMine expects Apple to exceed earnings estimates by 1
percent. Notably, Apple has not benefited from a rotation into
older tech stocks like Microsoft has. Its shares are down 6.1
percent on the year.
BIG MO? UH, NO
Along with Facebook Inc and Netflix Inc,
momentum names such as Gilead Sciences Inc, Biogen Idec
Inc and Illumina Inc are set to post results.
Investors are gearing up for wild swings in those names this
week. Trading in Facebook options expiring on Friday suggest
investors expect about a 12 percent move in the stock's price by
the end of next week. Weekly options are often used in advance
of a major event like earnings. Similarly, Netflix options also
suggest a 12 percent move.
After a spectacular performance in 2013, the selloff in many
of these stocks over the past few weeks has contributed to the
market's volatility. Whether they affect the broader market may
determine how well stocks trade this week.
The Nasdaq biotech index has dropped nearly 19
percent from its closing high on Feb. 25 while the Global X
Social Media Index ETF has tumbled 18 percent from its
March 6 high. However, both have bounced off drops of more than
20 percent that had sent each into bear market territory.
With the nervousness created by the declines in the momentum
names, investors have rotated into more defensive names.
"What happens at some point is (momentum names) become
disassociated from the market at large. People see this
happening, they become scared, and they start selling other
companies as well," said Stephen Massocca, managing director at
Wedbush Equity Management LLC in San Francisco.
"It gets to a point where that stops happening and the rest
of the market - outside of these crazy names - is not that
Some of those names, including Dow components Microsoft
, DuPont and Travelers, are identified by
Credit Suisse quantitative analysts as potential "contrarian"
picks as they're among the least loved by Wall Street analysts.
All three are also considered undervalued by StarMine's
measure of intrinsic value that looks at the long-term growth
expectations for these names. Microsoft, for example, is the
third-best performer in the Dow this year, having gained 7
percent for the year.
(Wall St Week Ahead appears every Sunday. Questions or
comments on this column can be sent via email to:
(Reporting by Chuck Mikolajczak; Additional reporting by
Caroline Valetkevitch; Editing by Jan Paschal)