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.
Updated: 9:30 p.m. ET SundayThe 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 | ||||||||||||
| 4/6/2012 | 3/30/2012 | % chg. | YTD chg. | |||||||||
| Dow Industrials | 13,060.14 | 13,212.04 | -1.15% | 6.90% | ||||||||
| S&P 500 | 1,398.08 | 1,408.47 | -0.74% | 11.17% | ||||||||
| Nasdaq | 3,080.50 | 3,091.57 | -0.36% | 18.25% | ||||||||
| Russell 2000 | 818.18 | 830.30 | -1.46% | 10.43% | ||||||||
| Crude oil | $103.31 | $103.02 | 0.28% | 4.53% | ||||||||
| (per barrel) | ||||||||||||
| U.S. Dollar Index | 80.09 | 79.14 | 1.20% | -0.54% | ||||||||
| 10-yr. Treasury | 2.06% | 2.22% | -6.99% | 10.16% | ||||||||
| Gold | $1,630.10 | 1,671.90 | -2.50% | 4.04% | ||||||||
| 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.
wowee the censors came back from their Easter Sunday dinners with a vengeance. at least two-three of my posts were wiped out and several others.
signs of the wonders and joys of "free speech" and of some good arguments and banter.
and so i slip into the night to sleep, and perchance to post again without getting censored. 
(must be ready soon to get those portfolio hedges in place - correction afoot? 
)
that was me brother noble. you know i rant but have love in my heart.
man, i agree with you on the fact that obama has a lot of liberal issues that keep surfacing including that will to spend, i agree that he has told his share of whoppers and that there are many unfulfilled campaign promises, and i agree that this health insurance will be expensive (wouldn't a single payer system have been less expensive?). and finally i agree that we are in a world of hurt on the debt - i send many a client to www.usdebtclock.org to see how really bad off we are as a nation.
with that said - i will continue to refer you to the long-term, rather simple and straightforward, balanced approach to reducing the debt as outlined by the YEAR-LONG, BI-PARTISAN national debt reduction commission known as simpson-bowles. it will work, but there must be pain and compromise from the far left and the far right.
the reason i "lean left" on this one is that the left has not signed up to never reduce spending - but the right has indeed signed up to never increase taxes.
and finally, your view of the coming tax policy corrections is simply off base. even romney will not raise taxes on the middle class - he will "etch-a-sketch" on that one because all of the wealthy know that they have the middle and lower class enslaved by credit card and mortgage debt (this pays the interest on their precious tax-free muni and state-tax-free government bonds) and they also know that these classes spend every dime in discretionary income on goods and services - dollars that flow right back to the wealthy in the form of business and corporate profits. no, the tax burden must and will fall mainly on the rich - they will gnash their teeth, rend their clothes and wail in the night - but in the end they will adjust and go back to counting their millions and billions of net worth.
peace out bro and Happy Easter.
"spending reduction + normalized tax policy = economic bliss and sustainability "
Well brother Peter, taking over the health care industry estimated to be 1/6th US economy, is hardly spending reduction.
After three months of combing through the hundreds of pages of the law and comparing their expected costs to the United States’ fiscal outlook for the next 75 years — just as the government currently does for other programs such as Social Security and Medicare — Senator Jeff Sessions’ staff estimated that ObamaCare has created a $17 trillion unfunded liability for the U.S. government.
No wonder the Senator was “floored.” President Barack Obama, after all, had promised that his healthcare overhaul would not add “one dime” to the federal deficit. Yet clearly, if changes are not made to future federal budgets, either by raising more revenue or by reducing spending elsewhere, ObamaCare will add $17 trillion to the national debt.
And with a $5 Trillion dollar Tax hike coming, most of the burden placed squarely on the shoulders of lower and middle income taxpayers, I would hardly call that a "normalized tax policy". My personal estimate with all the spending our gvt does, is that lower & middle income wage earners will need to cough up at least 75% of their wages to be paid in taxes, just for the government to break even.
THAT hardly sounds blissful to me! 
lol .. true troll colors at last ..
if we are going to discuss this, please first look up the definition/meaning/overview of the word socialist and then come back to the thread.
not to be grandiose but you don't know the level(s) of those you are posting with here. (degrees, doctorates, authors, political offices, corporate officers, economic policy experience, etc.) you must first get the basics in place. please.
I guess when the facts can't be refuted the name game starts. Then , the blame game begins.
Hello--- moron, we've had quite enough of the blame game, Bush, inherit, blah, blah, blah
A lot of NOISE coming from an over his head community organizer and his media minions.
Bush, Bush, Bush--4 years later and what did we get----- ????
EVERYTHING GOT WORSE!!!
He's a bye bye in Nov
Next cretin?
Barry 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 budget
- 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!
- 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"
Was that your question?
Which president created more debt than ALL OTHER PRESIDENTS COMBINED?
Was that your question?
Which president had the largest increase in food stamps and welfare fraud?
Was that your question?
Answer -- Barrack Hussein Obama!
Aren't we Lucky?
good post there c8's and a valid point. the way we see it we DO pick sides, but not as a generic pick like staight party-line (for example i live/grew up in the mid-west but am a NY Knicks fan).
we can be all for a balanced budget, strong immigation policy, and anti-welfare (all conservative hallmarks that put us "right of center" BUT we can also be pro-choice, pro-gay-marriage and pro-education vs. prisons. it is complicated.
so, that is why i/we CONGRATULATE the repub party for giving us a moderate conservative in romney (IF he does not ruin it with a Palin-like VP decision) to consider this fall. he will get a hard look and serious consideration.
as for the TP in the House - they just have to go so that we can get a congress able to compromise and legislate/govern America.
so, some issues/choices/candidates are complex for us, but others on the FAR left OR FAR right are much simpler. we cannot abide pelosi, reid or paul ryan. in the end y'all are PRINCIPLE-BASED (which i often admire and do understand) but we are more FACT-BASED and complicated - kind of like "American catholics" vs. "roman catholics."
you have a good one. 
well thank you for understanding my attempt at humor - they really are watching us all and the one percent is growing ever more powerful and controlling.
i am a self-made businessman/entrepreneur, believe in reality therapy and personal responsibility/accountability, am sometimes conservative and libertarian, and am always open to a good debate and a possible change of viewpoint.
IF romney gets a solid VP and also softens up on his tax policy and the shift of wealth*, then he will get a hard look from me and other moderates because he understands business and has a vested interest in seeing both the economy and stock markets improve. peace (especially on this day as He is risen).
* in 2011 a total of 37 percent of ALL OF THE WEALTH CREATED IN AMERICA went to the top 15,000 people - the top .0001 or one-one-hundredth of one percent. these people EARN on average $23.4 million per year. something is broken here.
ok alias - if this is all "barry's fault" - can you please tell us the political views and economic tactics (specifically tax policy) of THE ONLY PRESIDENT to actually balance the budget in the past thirty years?
can you tell us a little bit about the reins that were handed over to "barry" by the previous admin?
we will wait while you look those up since you don't hear about them on fox or from the pill-popper radio show. hint: think razorbacks.
a rare thumbs up to senor aka mfc aka emwolb. a direct, factual, accurate post.
they will never question their ingrained viewpoints as that would require admitting an intellectual error and actually changing past behaviors/views and cultural indoctrinations. ah well, fight the good fight.
p.s. and kudos for staying within the bounds of reasonable verbiage there sir. kudos.
stuck - here is a good article on norquist and his iron grip on our congress -
http://articles.latimes.com/2011/nov/04/opinion/la-ed-norquist-20111104
or just google "la times norquist mccarthy"
almost unbelievable.
and that is a PERFECT example of the conserv political process these days sugar-ray mirage, DUCK, DODGE, BOB, WEAVE, SPIN, EVADE, BLAME OTHERS, SAY NO, CRITICIZE, DEFLECT, WHINE, HAVE NO SOLUTIONS AND TAKE NO RESPONSIBILITY!
"And for the record Comrade ActiveRIA, the SENATE voted down Simpson-Bowles... the Democrats rejected it."
of REALLY? so the Democrats rejected it? you thus infer that the Senate is comprised of 100 percent dems! there are repubs and conservs in the senate as well sir - and they refuse to pass a balanced debt reduction budget and address the mounting crisis. they sit on their hands and vote no to everything even close to balanced or compromise. they fiddle while America burns and you and your ilk keep helping them fan the flames. absurd.
Let's see---- Hmmm!!!
Gas- Going to $5.00-- Hurray !
Deficit -- No end in sight! The answer -- Let's borrow more , give it away to more beggars and "green jobs scams"
Housing Markets? -Still a Disaster. most areas down 40%. A total joke.
Foreclosure - STILL growing . Inventories are HUGE! Banks are hushed up about what to release and when.
Unemployment - even 8% is a stupid high number!!
How about those new jobs (Wal-marts/Burger King - min wage!!!! - What the hey-- at least it's a job-- right? - WRONG! )
HELLO----THESE PEOPLE ARE CALLED :
UNDEREMPLOYED- and they number in the millions!
Race batter ? " He looks like my son"----- " we've all been there!"
Class warfare creator? -- dirty water, women's right-- snore- So predictable.
Liar? Please-- where to begin----
Transparency - LOL-- That is just too funny.
Don't we all remember those heady days of ---Hope & Change and yes--TRANSPARENCY ?
No--- it's going to be real hard to boot that kind of POS outta here!!! LOL
I hope you are the DEM campaign manager, perhaps genius?
Stay cocky and don't worry dear leader and government will take care of you from cradle to grave!!
Vote Democratic and never work again!
Happy Easter. GOD Bless you all!
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