Will earnings season stall the rally?

First-quarter earnings growth is expected to shrink. That could make the week ahead volatile -- especially after Friday's disappointing jobs report. The week's big reports include Alcoa, Google, JPMorgan Chase and Wells Fargo.

By Charley Blaine Apr 6, 2012 7:07PM
Charley BlaineUpdated: 9:30 p.m. ET Sunday

The big question before Friday was whether inflationary pressures were going to kill the 2012 stock market.

After Friday's disappointing jobs report that saw employers add 120,000 new jobs, the question has morphed into whether the economy is strong enough to support the rally. That could add a new round of volatility into the week ahead.

It features two widely followed reports on inflation and the Federal Reserve's Beige Book report, a narrative look at the economy. And it's the start of the first-quarter earnings season, with important results due from Alcoa (AA), Google (GOOG) and two of the nation's biggest banking companies, JPMorgan Chase (JPM) and Wells Fargo (WFC).

Futures trading after the jobs report came out on Friday suggested a sharply lower open for U.S. stocks on Monday. That downtrend continued Sunday evening when electronic opened, with Dow Jones industrials ($INDU) looking at opening down 140 points and the Standard & Poor's 500 Index ($INX) poised to open off 18 points. Perhaps luckily U.S. markets won't have to deal with what Europe might throw at them; exchanges on the continent will be closed for the annual Easter break.

The pressure on the markets will start with a disappointing market performance in the past week. The Dow fell 1.2%, with the S&P 500  down 0.7% and the Nasdaq Composite Index ($COMPX) down 0.4%.

Article continues below.
These were not large losses, but they were surprising, spurred in large part by signals from the Federal Reserve that it might not be willing to expand or extend economic stimulus measures without a good reason. Read: major economic pullback.

The pressure on the market was exacerbated by the re-emergence of Europe as a worry. This time, the problem was Spain, whose recession is deepening as the government implements severe austerity measures to bring its debt under control.

Add to that the size of the market's move since October. From the its intraday low on Oct. 3, the Dow had risen 27.5% through the April 2 close, with the S&P 500 up 32% and the Nasdaq up 35.7%.

Those are enormous gains that put the market at four-year highs in the case of the Dow and S&P 500 and an 11 1/2-year high for the Nasdaq. Moreover, a number of technical indicators -- relative strength indicators, gaps between current prices and 200-day moving averages -- suggested the market had become overbought.

So pullbacks were inevitable, and they came, with the exception of Apple (AAPL), which is now up 56.5% for this year alone.

One can argue that the selling came because a lot of investors simply wanted to take profits while they were ahead.

Markets for the week



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Note: Stock markets were closed Friday for Good Friday. Some futures and bond markets were open.

Will earnings disappoint?
Which brings us to the fundamentals. Stock prices ultimately move up because investors see earnings growing or rebounding. And here the question gets tricky.

Here's why: Thomson Reuters says S&P 500 earnings grew 9.2% in the fourth quarter of 2011 and 18.9% in the first quarter of the year.

Right now, Thomson Reuters is predicting that S&P 500 companies will see earnings growth of just 3.2% in the first quarter. Take out Apple, and the growth rate drops to 1.8%. (Apple's earnings grew 115% in its fiscal-first-quarter and over the past five quarters averaged 100.5% gains.)

There have been 83 negative warnings so far for the quarter, compared with 28 warnings of earnings improvements. The 3.0 ratio is the weakest since the fourth quarter of 2008.

Why is earnings growth stalling? Partly because earnings were so strong in 2011 (and 2010 for that matter). The law of averages says the earnings will ultimately come down.

If earnings aren't growing, will stock prices? We'll find out. 

The week's earnings: Alcoa, Google, JPMorgan Chase and Wells Fargo
Alcoa starts the earnings season off after Tuesday's close. The report is likely to be downbeat. The company is expected to report a loss of 5 cents a share, down from 28 cents a share a year ago. Revenue of $5.74 billion would be off 3.6% from a year ago.

The problem is global oversupply that's forcing producers to close facilities and lay off staff to try to match supply with demand. Alcoa announced Thursday it is cutting alumina production by 4% in its Atlantic region.

Pressure has been mounting for the aluminum industry to reduce capacity because of a global production surplus. Spot alumina prices in mid-March were around $315 a ton, Reuters said, down from above $400 at the end of last year, according to traders, who attributed the fall to smelter capacity cutbacks and lower aluminum prices at the London Metal Exchange.

In March, spot alumina prices rose 2% in China, the world's top producer of aluminum and alumina, on the expectation that Chinese production would fall in the second half of 2012.

Thursday brings Google, tool-distributor Fastenal (FAST) and drugstore operator Rite-Aid (RAD).

Google is a bit of a mystery. Its fourth-quarter results missed on earnings per share and revenue. The stock has struggled so far this year. It's down 2.1% on the year after an 8.7% gain in 2011. The stock closed at $632.32 on Thursday, $1.36 lower than Apple's share price. (Apple has, by far, the largest market capitalization.)

The issue with Google is lots of things: fights over patents, privacy and other issues; worries that phones based on the Android operating system aren't doing as well; and probably concern that Europe's economic woes will hurt earnings.

Fastenal shares are up 21% this year but dipped 3% in the past week as worries about the economy began to take over the stock market. The company doesn't offer guidance, but the consensus is for 35 cents a share in earnings on revenue of $767.6 million, up from 27 cents and $640.6 million a year ago. The company makes fasteners and tools and is a bet on the construction industry. A big question for management is whether the recovery is real.
Rite Aid said same-store sales in March were up 4.6%, with pharmacy sales up 3.2%. The stock has risen 37% this year mostly because the company is considered a takeover candidate.

Friday offers the two biggest banks by market capitalization: Wells Fargo and JPMorgan Chase, both before the open.

Both have big fans on Wall Street, even if their businesses are quite different. JPMorgan is a global banking powerhouse. Wells Fargo is more domestically focused and has a huge mortgage business.

Wells Fargo's market capitalization at $178.01 billion is the largest of any U.S. banking company, even if it's not seen as a money-center bank like JPMorgan, whose market cap is "only" $169.49 billion.

Wells Fargo shares are up 22.4% this year; JPMorgan's are up 33.4%.

Wells Fargo is expected to earn 72 cents a share on revenue of $20.5 billion, up from 67 cents a share and $20.3 billion in revenue a year ago.

JPMorgan is expected to earn $1.15 a share, down from $1.28 a share a year ago, according to Reuters. Revenue is projected at $24.6 billion, down from $25.79 billion.

Both have seen credit-card operations improve. Both have seen improvements in their mortgage businesses. The ultimate question is whether they're lending more to help the economy grow.

Two important inflation reports and the Beige Book
There are three big economic reports. Two will shed light on whether inflation is a big problem or simply a problem.

The first comes Thursday with the Producer Price Index report for March from the Labor Department, which will follow that up on Friday with the March Consumer Price Index Report.

The key questions are whether food costs are an issue. The second is how much gasoline prices are affecting matters. Gasoline prices rose some 11.3% between mid-February and mid-March. The surveys used to generate the index are done midmonth. So, the headline number is likely to be nasty.

The third report comes before the PPI and CPI: the Federal Reserve's Beige Book Report. This a narrative report compiled by staffs at the 12 regional Federal Reserve banks. It should offer some sense of where economic stresses are.

Also due next week is the University of Michigan Consumer Sentiment Index. This will shed some light on how consumers are coping with gas prices and other issues.
Apr 6, 2012 8:47PM
I believe government economic data as much as I believe that chick holding the lottery ticket in Maryland.
Apr 6, 2012 11:11PM
120,000 "New Jobs"... Where?  What sector?  Sounds more like 120,000 INTERNS working WITHOUT pay.  The Government spits out these bogus numbers to make people think everything's getting better, it's not!
Apr 6, 2012 9:51PM
Market rally??? What a joke ..... the unemployment numbers are up, hiring is down ... the stock market is on the decline (at least 10% by summer) gas will be up to $5.00 per gallon, and mostly ... the debt is now over $6 trillion. It is unpayable debt and consequently we will head into some serious inflation, devaluation of the dollar and ultimately a recession!! Face it ... we are one step away from being bancrupt. And all this coming right before the election!!! (LOL) Hey Barry, what cha gonna do .... GULP!! Ah ... Nancy, Hillary .... HELP!!
Apr 8, 2012 8:12AM

And why do people continue to follow PARTS  of failed Keynesian economic policy?  This economic theory as practiced by our Politicos is flawed beyond hope. 


Sorry, but you cannot Tax, Borrow, Spend and Debase your way  to prosperity, no matter  what '57 States' and the donkey minions tell you.  The printing press and government spending are not the answer....

Apr 6, 2012 7:49PM
How many ways can you divie up your paycheck and keep the wheels turning and food on the table? Necessities steal consumer cash from optional luxuries or quality upgrades. Consumers again question whether working pays. Those who commute look for work close to home and the smaller paycheck that often accompany s that. Craftsman and skilled tradesman feel slighted again. Congress feels your pain but they don't suffer along with us. As the land of plenty unwinds, remember, we got the mess we voted for.
Apr 7, 2012 8:10AM

Comrade ActiveRIA...


You mean the do nothing Senate?  The hous has passed a budget, for the last 2 years.  They even voted on Obama's budget.  It lost 424-0, even Nancy Pelosi could not stomach it.   It is the do nothing Senate that held up progress.


The Democrats are the party the refuses to compromise.   The Republicans have said they will raise taxes, with three caveats...  1.  The budget must have 1 trillion in cuts this year.  2.  There will be NO new spending (Obama proposed 900 Billion in new spending).  3.  All money raised via taxation must be used to reduce the deficit.  


It is the demcorats that are unreasonable and uncompromising.  They insist on new spending, borrowing and debasing. 


This November we must  get rid of Obama and another 2000+ Donkey office holders, just like in 2010.  Until that is done there can be no progress on the Deficit, Budget or putting the economy on a sound finacial footing.   I am sure you don't Advise your clients that earn 22,000 a year to spend 38,000 or be in debt 156,000...  How long could they do that?

Apr 8, 2012 9:47AM



You make perfect sense.  Perhaps W was right to put his "Stimulus" in everyones pocket, as opposed to Obama giving his to his campaign contributors and special interest groups.   880 Billion is about 2850 per person.   I am sure if a family had recieved a check for 11,400, that would have been a far better stimulus.  Although now you recieved the payment book for that instead going forward...


Get rid of "57 states" and as many of his Donkey henchmen as possible!

Apr 8, 2012 9:41AM

hmmm...  With China buying massive amounts of Au/Ag/Pl/Pd does this lend any credence that China is planning to return to the Gold Standard?   If China returned to the gold standard would that spell doom for the dollar as the reserve currency?  


China has long adapted planning economic activity  long into the future.  Would not China returning to the gold standard turn us into a 3rd world country pretty quick?  And what could we do about it?  They hold so much of our debt. 


We are the same economic path as Japan was.  We are in deep trouble, and I would say Bernache already drove off the cliff with Obama cheering him on.  The question is how hard will be go splat?

Apr 8, 2012 11:14AM
By definition, you are correct Mirage. By effect on my spending habits, inflation empties my wallet and deflation shuts it. Sometimes as I try to put economic principles into my real life perspective, i fail. 
Apr 8, 2012 9:55AM
An old saying goes, 'Want to own a bank? Get them to lend you a billion dollars. Refuse to pay it back and you'll own that bank.' By that saying - don;t we own China?
Apr 8, 2012 9:32AM
Stuck in Kansas, the current defense budget is around 820 Billion.  I think the first year, 220 billion is a better objective the first year.  With another 50 Billion over each of the next 2 years.  This would leave some time for intelligent planning, and not tie the Presidents hands.   And as for legalizing 420, I am Ok with that.  Turn it over to Philip Morris, and I am sure they will have far better quality, and we tax  it as a cigarette...  Maybe more!
Apr 6, 2012 9:12PM
Over the Christmas Holiday, I decided that work wasn't worth it to me any longer and I could live Conservative-ally off my investment income. I will feed less to the system. I take nothing from the government and will gladly resume working once the government gets serious about waste, fraud and abuse. No increase in taxes without a careful decrease in the budget. I walked , not just talked and I am not part of the unemployment number.
Apr 8, 2012 8:20AM

Alias, you are incorrect.  Obama has  not accumulated more debt than all other Presidents combined yet.


Our debt stood at 10.2 Trillion the day Obama took office, today it stands at 15.6 trillion for a 5.4 trillion increase.  5.4 trillion is less than 10.2 trillion.   Although at the rate Mr. Obama is adding debt, and he  is re-elected, the debt will likely climb to well over 22 Trillion by the end of his second term.  At 4% interest, that would be 880 billion in interest  alone, or 70 billion more than the defense budget.


Specie, foreign currency, and stocks will be the coming inflation havens.   Mr. Bernache is on the path of the Weimar Republic.  Plan accordingly...

Apr 8, 2012 8:29AM

And for the record Comrade ActiveRIA, the SENATE  voted down Simpson-Bowles...  the Democrats rejected it. 


The Republicans will increase taxes, as soon as the democrats come forward with their vision of 1 billion in cute the FIRST year. 


The ONLY proposal the Democrats  have brought forth is Obama's budget (900 billion in new spending 600 billion n new taxes).  It recieved ZERO democrat votes.  Once Obama brings forth a budget with at least 1 Trillion in REAL spending cuts, I am sure the Republicans will RAISE taxes.

They will start with getting rid of the Obama's Social Security  tax slashing, and increase the Social Security and Medicare Taxes to make up for the damage Obama has done to the systems.

Then they can address a millionaires tax, with all the proceeds to be used EXCLUSIVELY for deficit reduction, not for Obama's failed venture capital spending to his campiagn contributors, like Solyandra... 

Apr 8, 2012 9:35AM



Following your reasoning - who has that money>Largely banks and corporations. What do they do with it? The vast majority of Americans are tapped out - no discretionary income. If Helicopter Bill had dropped that money from the sky all across America then we'd have inflation damn fast. Why aren't the banks swooping in to buy those cheap houses everywhere? They would make a killing when they inflate again, if ever. Banks don't buy goods or property, they just sit on their T bills.

Apr 8, 2012 9:24AM
Cut defense in half! there is 40% of $1 trillion right there.

Stop the war on drugs and legalize pot. There is a couple hundred billion more in savings. Legal pot would save billions in court and prison cost, create 1000's of jobs, and raise billions in tax dollars.

Apr 6, 2012 10:53PM
I went home and quit working in December.  Just not worth it.  I have saved and saved and saved and have ss and my pension.  We'll see how long it lasts.  
Apr 8, 2012 7:05PM
  • PartyBarry Soetoro, Your a silly man with a silly mind, lets check the real debt numbers and see what we get.
  • Bush's added spending to a balanced budgetCrying
  • Iraq/Afghan Wars 1,469 trillion
  • Bush tax cuts 1,812 trillion
  • Increased Discretionary spending 608 billion
  • Tarp 224 billion
  • Medicare D 180 billion
  • 2008 Bush Stimulus 773 billion
  • Bush's Total added spending = 5.07 TRILLION
  • WOW!Surprised
  • Obama projected increases through 2017
  • 2009 stimulus 711 billion
  • Discretionary spending 278 billion
  • Bush tax cuts 425 billion
  • Health Care Reform 152 billion
  • Total Obama increases of 1.44 TRILLION
  • So Barry when somebody asks you where our debt came from just say "BUSH BUSH"
  • Nerd
Apr 7, 2012 7:54PM

The U.S. Constitution being written/formed from 1787-1789, and then ratified in '89, establishing our Republic or Government....The Bill of Rights were added in 1791 after the Radification.


With the Document being around 220-224 years old, I really don't see a Community Organizer, being able to discard or destroy it.


If anything, I thought we actually lost some of rights after 2001 and don't believe Obama had anything to do with that...?

MY ONLY QUESTION, were you jumping up and down and raising hell about our Constitution then ?? As far as I'm concerned anyone that didn't was an idiot...And not an American.



Apr 7, 2012 10:15PM
Red lipsI vote Republican because I believe Americans should pay 1/3rd more for Health Insurance than other industrialized Nations. I really don't need an extra 2 to 3 thousand dollars in my bank account each year, I'd probably just blow it on a better quality of life or just throw it away into long term investments for my retirement. Health Insurance CEO's make 10 to 80 million per year and when I give them my premiums I feel wonderful knowing I'm supporting the kind of life style I'll have some day for voting Republican, plus they give 100's of millions to my party each year so I know I'll never be force by the Government to pay 1/3rd less in premiums for the same coverage. Vote Republican and support my values.Broken heart
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[BRIEFING.COM] Equity indices extended this week's losses with a broad-based retreat. The S&P 500 fell 0.6% to end the week lower by 1.1%, while the Russell 2000 (-1.1%) finished with a 0.9% decline since last Friday.

Staying true to the theme observed throughout the week, the energy sector (-1.5%) tumbled out of the gate, thus dragging the broader market down with it. Once again, dollar strength and crude oil weakness contributed to sector's underperformance, but the ... More


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