Investors seek profit
turnaround to drive stocks higher
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[October 15, 2016]
By Lewis Krauskopf
NEW YORK (Reuters) - A heavy slate of U.S.
corporate earnings could set the course next week for a wavering U.S.
Better-than-expected big bank earnings on Friday somewhat helped shore
up Wall Street's confidence, which has been shaken by a rocky beginning
to third-quarter reporting season, marred by disappointing results from
industrial and healthcare companies.
But with the bulk of results still to come, investors are counting on
large U.S. companies to stop a year-long streak of profit declines. Next
week's reports include Microsoft <MSFT.O>, General Electric <GE.N>,
Johnson & Johnson <JNJ.N> and Bank of America <BAC.N>.
Mixed initial results have added to other concerns in recent days that
hurt equities, including weak economic data in China, worries over
Britain's exit from the European Union, and the likelihood of a Federal
Reserve interest rate hike before year-end.
After a second straight week of losses, the S&P 500 sits about 2.5
percent below its all-time closing high set two months ago.
"The exuberance you saw this summer as it got to new highs was built on
the premise that prices were leading a breakout in earnings," said Bruce
McCain, chief investment strategist at Key Private Bank in Cleveland.
Investors "were looking for a pretty strong breakout in the second half
of the year to make up for a very weak first half, and I just don't know
that that's in the cards," McCain said.
With 34 S&P 500 companies reporting so far, third-quarter earnings are
expected to slip 0.4 percent, according to Thomson Reuters I/B/E/S.
But given how many better-than-expected reports typically occur,
investors are eyeing the quarter to potentially end with earnings in
S&P 500 profits fell 5 percent in the first quarter and 2.1 percent in
"At the end of the day, it really is all about earnings. Every economic
data point filters down into earnings," said Karyn Cavanaugh, senior
market strategist at Voya Investment Management in New York.
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Traders work on the floor of the New York Stock Exchange (NYSE) in
New York City, U.S., October 14, 2016. REUTERS/Brendan McDermid
"When we actually move to positive, I think psychologically that will be
a point for investors to say, 'Wow, this really is probably the best
place to be in terms of investing. You have to be in equities'," said
Strong earnings forecasts will be important for supporting historically
expensive stock valuations. The S&P 500 trades at nearly 17 times
earnings estimates for the next 12 months, against its historical
average of 15 times.
One potential obstacle to upbeat outlooks is the strengthening U.S.
dollar, which this week climbed to its highest since March against a
basket of currencies <.DXY>.
Multinational companies that generate business outside the United States
stand to see those sales reduced when translated back into dollars.
Alan Gayle, director of asset allocation at RidgeWorth Investments in
Atlanta, said he will be watching "whether or not businesses feel like
they have their operating models working well and under control, and if
the dollar turns into the excuse du jour for weak guidance or missing
"At these valuation levels, the market gets to be vulnerable," Gayle
(Reporting by Lewis Krauskopf; Editing by Nick Zieminski)
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