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Stocks Could Slip as Earnings Taper Off
Sat February 7, 2004 12:27 PM ET
By Vivian Chu
NEW YORK (Reuters) - Stocks could drift lower next week, as earnings season winds down and investors search for fresh catalysts to drive the market higher after a buying spree over the past 11 months.
Next week will bring another slew of earnings reports from corporate America, and though profit growth has been strong in the last quarter, Wall Street has been increasingly impervious to the good news.
Major market indexes have slipped over the past two weeks even after companies delivered robust results, as investors cashed in gains from a stock rally that began last March.
"Our sense is that the market continues to consolidate. Investors had high expectations for fourth-quarter announcements, and generally they've been met," said Frederic H. Dickson, senior vice president at brokerage D.A. Davidson & Co. in Portland, Oregon.
Additionally, "companies aren't getting up on a soap box and giving glowingly a positive picture of what's coming in the next quarter," Dickson added. "Sentiment is still pretty good, but there's no eye-popping catalyst that would cause investors to want to push ahead dramatically and want to buy up stocks."
As of Friday, roughly 80 percent of Standard & Poor's 500 companies reported quarterly results, said Ozan Akcin, chief market strategist at Puglisi & Co. in New York.
Companies reporting so far have reported year-over-year earnings growth of about 22 percent, Akcin said. On average, last quarter's results beat Wall Street's average estimates by about 5 percent -- above a historical rate of roughly 3 percent.
Despite the strong improvement in earnings, investors are still reeling from last week's comments from the Federal Reserve, which hinted it might be closer to an interest-rate hike sooner than most Wall Streeters were expecting, Akcin said.
Moreover, many investors remain leery after technology bellwether Cisco Systems Inc. gave a cautious outlook about corporate spending in its earnings report on Tuesday.
"Cisco probably did the worst thing they could do, in terms of denting investor confidence for a pickup in capital spending," Akcin said. "The market's very sensitive as a result" of Cisco and the Fed.
"I would say we're in for more weakness next week, since the market's still trying to get a hold of what's going on."
Stock indexes finished higher on Friday, but wrapped up the week on a mixed note. For the week, the blue-chip Dow rose 1 percent, ending two weeks of declines, while the broader S&P 500 also gained 1 percent. But the technology-laden Nasdaq ended down 0.1 percent, its third straight down week.
G7 REMARKS AWAITED
Next week, companies in the earnings spotlight include Dow components The Walt Disney Co. and Coca Cola Co. ,which both report results on Wednesday.
Technology bellwethers due to post results include computer maker Dell Inc. (DELL.O: Quote , Profile , Research ) and Nvidia Corp. , a graphics chip designer, which both report on Thursday.
Besides earnings, analysts said stocks could also take a cue from this weekend's meeting of the world's most exclusive economic club, the Group of Seven richest nations.
The meeting of the G7 finance ministers and central bankers -- which kicked off on Friday at the posh Boca Raton Resort and Club in Florida and will wrap up with a closing statement late Saturday -- comes amid rising worries over the slumping value of the U.S. dollar.
Few analysts believe a substantive deal on slowing the dollar's decline is likely to result from the G7 meeting.
But many have speculated about a change in wording in the final G7 statement that would seek to warn about the consequences of currency volatility.
Though the Bush administration publicly says it supports a strong dollar, it has also been careful to add that its value should be determined in competitive markets. The United States has appeared comfortable with a weaker dollar, which helps its exporters and economy in an election year, and has no adverse effects on inflation rates.
"If the dollar continues to decline, it's good news for the earnings of multinationals, but it's bad news because foreign investors will continue to back away from our market," since it makes dollar-denominated assets less attractive, said Hugh Johnson, chief investment officer at First Albany Corp.
FISTFUL OF INDICATORS
On the economics front, most of the key indicators fall on Thursday, when the government will issue weekly claims for jobless benefits, as well as reports on business inventories for December and retail sales for January.
Analysts will be closely eyeing January's retail sales for signs whether consumer spending, which accounts for about two-thirds of U.S. economic activity, could be slowing down.
Economists will scrutinize the inventories report for signs that businesses are restocking their shelves to keep up with demand. U.S. businesses have kept their inventories at historically lean levels in the past year, as they waited for a pickup in the economy.
But Friday will bring some numbers worth noting: On tap are the December international trade deficit, projected to widen to $39.45 billion from $38.01 billion in November, and the University of Michigan's preliminary February reading on consumer sentiment, forecast to dip to 103.3 from January's final reading of 103.8, according to economists polled by Reuters.
(Wall St Week Ahead runs every week. Questions or comments on this column can be e-mailed to: vivian.chu@reuters.com)
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