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 Several behemoths, including Apple, the largest U.S. company by
market value, as well as Microsoft, McDonald's <MCD.N> and AT&T <T.N>,
are due to report earnings.
They'll be accompanied by highfliers like Netflix and Facebook,
giving the first real cross-section of the state of corporate
America as temperatures rise across the country and investors hope
to put the cold weather behind them. Strategists will also be
looking for clues on how badly China's slowdown hits U.S. corporate
results.
The first batch of earnings came out as equities were working their
way through a selloff led by trading-crowd favorites like Netflix
and the biotech stocks. With the late-week recovery, the hope is
that the recent volatility has ebbed. If poor results dominate next
week's action, that could reignite the selling.
"We are still off our highs, but we still remain in an uptrend so it
would not surprise me to see sideways action," said Andre Bakhos,
managing director at Janlyn Capital LLC in Bernardsville, New
Jersey.
"If we were to have a set of earnings releases that were well off
expectations to the downside, that could create hesitation in the
market."
A few themes will dominate in the coming week: The outlook for
China, the rotation to slower-growing stocks, and results from
high-flying trading favorites.
S&P 500 companies' first-quarter earnings are projected to have
increased 1.7 percent from a year ago, Thomson Reuters data showed.
The forecast is down sharply from the start of the year, when profit
growth was estimated at 6.5 percent, but has climbed from a low of
0.6 percent reached on Wednesday.
That jump occurred despite notable disappointments from IBM Corp <IBM.N>
and Google Inc <GOOGL.O>. Even with those two lackluster reports,
equities still mostly rallied on Thursday.
The benchmark S&P index rose 2.7 percent for the holiday-shortened
week, helping the index recapture nearly all of the declines
suffered in the previous week. The U.S. stock market will be closed
for Good Friday.
THE CHINA CHALLENGE
Investors eyeing the impact of China's troubles on corporate
America's bottom line will have a few spots to pick from, including
Apple <AAPL.O>, Qualcomm <QCOM.O> and Yum Brands <YUM.N>.
There have been warning signs, with IBM saying this week that its
disappointing quarterly revenue was due to worsening sales in the
world's second-largest economy and other emerging markets. Earlier
in the week, China reported growth came in at its slowest pace in 18
months.
Qualcomm's <QCOM.O> revenue for its fiscal year ended September 29,
2013, showed China accounted for nearly half of the company's
revenue. Options activity in Qualcomm has been defensive in nature,
with investors paying more money to hedge against a fall than a rise
in the stock's price.
But strategists at Goldman Sachs see this as a buying opportunity,
believing the options data shows investors are overly concerned
about the quarter.
Apple Inc <AAPL.O> also derives 13 percent of its sales from China,
according to Thomson Reuters data. The company was once a favorite
among momentum investors looking to capitalize on swift price gains,
but the stock dropped sharply from all-time highs reached in late
2012. It has been mostly stuck in a range for the last year.
StarMine expects Apple to exceed earnings estimates by 1 percent.
Notably, Apple has not benefited from a rotation into older tech
stocks like Microsoft has. Its shares are down 6.1 percent on the
year.
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BIG MO? UH, NO Along with Facebook Inc <FB.O> and Netflix Inc <NFLX.O>, momentum
names such as Gilead Sciences Inc <GILD.O>, Biogen Idec Inc <BIIB.O>
and Illumina Inc <ILMN.O> are set to post results.
Investors are gearing up for wild swings in those names next week.
Trading in Facebook options expiring next Friday suggest investors
expect about a 12 percent move in the stock's price by the end of
next week. Weekly options are often used in advance of a major event
like earnings. Similarly, Netflix options also suggest a 12 percent
move.
After a spectacular performance in 2013, the selloff in many of
these stocks over the past few weeks has contributed to the market's
volatility. Whether they affect the broader market may determine how
well stocks trade next week.
The Nasdaq biotech index <.NBI> is down nearly 19 percent from its
closing high on February 25 while the Global X Social Media Index
ETF <SOCL.O> is down 18 percent from its March 6 high. However, both
have bounced off drops of more than 20 percent that had sent each
into bear market territory.
With the nervousness created by the declines in the momentum names,
investors have rotated into more defensive names.
"What happens at some point is (momentum names) become disassociated
from the market at large. People see this happening, they become
scared, and they start selling other companies as well," said
Stephen Massocca, managing director at Wedbush Equity Management LLC
in San Francisco.
"It gets to a point where that stops happening and the rest of the
market — outside of these crazy names — is not that overvalued."
Some of those names, including Dow components Microsoft <MSFT.O>,
DuPont <DD.N> and Travelers <TRV.N>, are among those identified by
Credit Suisse quantitative analysts as potential "contrarian" picks
as they're among the least loved by Wall Street analysts.
All three are also considered undervalued by StarMine's measure of
intrinsic value that looks at the long-term growth expectations for
these names. Microsoft, for example, is the third-best performer in
the Dow this year, having gained 7 percent for the year.
(The market will be
closed for Good Friday. Questions or comments on this Wall Street
Week Ahead column can be sent via email to
charles.mikolajczak@thomsonreuters.com.)
(Reporting by Chuck Mikolajczak; additional reporting by Caroline Valetkevitch;
editing by Jan Paschal)
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