19/04/2014 08:47 AST
Earnings season shifts into high gear next week, and with nearly one-third of S&P 500 names set to post results, investors hope the news provides a catalyst to buy stocks and leave the market's recent weakness in the dust.
Several behemoths, including Apple, the largest U.S. company by market value, as well as Microsoft, McDonald's and AT&T, 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 and Google Inc . 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, Qualcomm and Yum Brands.
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 revenue for its fiscal year ended Sept. 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 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.
Business Standard
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