More than 60 S&P 500 companies are scheduled to release results next
week, including more than half a dozen Dow components. The reports
will give the fullest picture yet of how corporations are faring and
whether the market can advance further as Fed stimulus begins to
"Given that equities are fully valued and arguably overvalued, we
need earnings and revenue to come through to support the gains we've
already made," said Jack Ablin, chief investment officer at BMO
Private Bank in Chicago. "There's a reasonable chance we could see a
10 percent correction in the event we get some high-profile
Earnings for S&P 500 companies are seen rising 7 percent in the
quarter, down from the 7.6 percent rate that had been forecast at
the start of the year.
While the season started with many financial firms, including
JPMorgan Chase & Co <JPM.N> and Bank of America <BAC.N>, topping
profit expectations, Intel Corp <INTC.O> sounded a sour note,
slumping on a weak revenue outlook. General Electric Co <GE.N> sold
off despite posting higher-than-expected revenue, suggesting blowout
results may be needed to justify elevated valuations.
With 10 percent of the S&P 500 having reported results so far, 50
percent have topped earnings forecasts, well below the historical
average of 63 percent, according to Thomson Reuters data. More than
67 percent have beaten revenue expectations, above the long-term
average of 61 percent.
Procter & Gamble <PG.N>, McDonald's <MCD.N>, Microsoft <MSFT.O>,
Johnson & Johnson <JNJ.N> and Verizon Communications <VZ.N> are
among the Dow components scheduled to report next week. Texas
Instruments <TXN.O> and Starbucks Corp <SBUX.O> are also on tap.
The U.S. stock market will be closed on Monday for the Martin Luther
King Jr. holiday.
WATCHING FOR SIGNS OF BUSINESS SPENDING
BMO's Ablin said that results from more cyclical groups would be
especially important for insight into the strength of the overall
"The next leg of the cycle has to be driven by business spending,"
he said. "I'm looking for clues that businesses are taking their
excess cash flow and spending it, which means tech and industrial
reports will be very important, especially any outlooks they offer."
Another key name will be Netflix Inc <NFLX.O>, the S&P 500's biggest
gainer in 2013. The online movie renter's stock nearly quadrupled
last year, raising concerns it may follow the same path as another
of 2013's momentum favorites, Best Buy Co Inc <BBY.N>. On Thursday,
the electronics retailer's stock suffered its worst daily decline
since 2002 after posting weak holiday sales and giving a downbeat
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Jonathan Krinsky, chief market technician at MKM Partners in
Greenwich, Connecticut, said the market was "absolutely vulnerable
to a pullback on big disappointments," though the S&P 500 might find
support at its 50-day moving average, about 1.7 percent below
Friday's close at 1,838.70.
"If we take that out, that would be the first time we've made a
lower low in a while," he said. "That could push us to retest the
December low around 1,770."
In the latest week, the Dow rose 0.1 percent, the S&P 500 slipped
0.2 percent and the Nasdaq climbed 0.6 percent. Both the Dow and S&P
500 are within striking distance of all-time highs.
For the year so far, the Dow is down 0.7 percent and the S&P 500 is
down 0.5 percent, while the Nasdaq is up 0.5 percent.
The forward price-to-earnings ratio for the S&P 500 is about 15.22,
according to Thomson Reuters data, roughly in line with the historic
average. While that suggests valuations are not tremendously
stretched, further steep gains may be difficult to come by.
"We're much more likely to fall on negative earnings than we are to
rally on strong ones," said Bruce Bittles, chief investment
strategist at Robert W. Baird & Co in Nashville. "There's much more
downside risk than upside at these levels, and that will probably be
the case until we work off some of the excess out there."
Next week will be a light one for economic data, with Thursday's
read on December existing home sales perhaps the biggest report.
Sales are forecast to edge up for the month, according to economists
polled by Reuters.
(Editing by Nick Zieminski and Jan
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