Marc Pado Comments: Earnings Reports Hold Key To Sustainability

July 12, 2010, The Business Times

PROMPTED by rising expectations for the coming second-quarter earnings season, investors took a break last week from the stockmarket blues. Instead, bargain hunters went on a buying spree to reposition their portfolios ahead of the reports of strong profits.

Whether last week's bounce can be sustained will be determined by just how powerful a quarter of bottomline growth and topline improvement S&P 500 companies provide to Wall Street.

'The headline-driven fears of recession and deflation have obscured just how strong and well-positioned for a low-growth economy most of the biggest companies in the US are right now,' said Merrill Lynch strategist David Bianco, who is anticipating S&P 500 profit growth of US$88 to US$90 per share in 2011. He sees outsize profit margins ahead.

Other Wall Street analysts are less optimistic. 'We're facing some powerful headwinds and I doubt the negative sentiment that has dumped the major US stockmarket indexes 15 per cent or more off their April highs is going to reverse itself for very long regardless of how much earnings surprise to the upside,' commented Marc Pado, chief market strategist at Cantor Fitzgerald, who expects the stock market to recover another 5 per cent in the coming weeks before stalling for the rest of the summer.

Even bulls such as Mr Bianco, who maintains his forecast that the S&P 500 would reach 1,300 by year-end, admit that their short-term outlook is far from certain. Depending on the earnings reports and outlooks, the S&P 500 could either climb towards 1,100 or plunge towards 900, he feels.

That uncertainty is reflected in the quarter's profit growth estimates. Wall Street firms are looking for anywhere from Wells Fargo's 20 per cent year-on-year profit growth estimate to the 42 per cent gain from Standard & Poor's. The average estimate stands at 27 per cent, according to Thomson Reuters.

Traders said that it was a good sign that a big earnings beat pre-announcement by State Street last week was the first catalyst for the bounce that helped the market recover nearly 5 per cent of its losses in the last four days of trading.

'State Street's announcement helped calm some fears that banks might start talking about negative impacts already,' said Art Cashin, head of floor trading operations at UBS Securities.

If investors check the pre-announcements leading up to this earnings season, they'll find they bode well for the all-important earnings 'beats' that help boost stock prices. Although negative pre-announcements have outnumbered the positive ones by a count of 70 to 59, that's far below the 2-to-1 negative-to-positive ratio seen in an average quarter.

But any celebration over big second-quarter results will quickly fade unless the positive numbers reflecting the past quarter are supported by company executives' outlooks for the current, third quarter and the fourth quarter after that.

To keep the good times rolling, Wall Street will need to see big profits and reassuring comments from companies such as JPMorgan, Citigroup, Intel and General Electric this week.

'Even more than usual, this first week of the quarterly confessional season is the tone setter, with reports from key bellwether companies in the most-watched sectors the financials, technology and materials,' said Mr Pado.

Following tradition, the second-quarter earnings season kicks off unofficially after the bell today when Dow component Alcoa offers up its results. Thirty-six other companies, including American Airlines parent AMR and railroad transport company CSX Corporation, are expected to release their quarterly profits today.

Intel's earnings will be the highlight tomorrow, a day that also includes software maker Infosys Technologies, toolmaker Stanley Corp and apparel conglomerate Yum! Brands.

Wednesday has hotelier Marriot while JPMorgan's highly anticipated profit report is due on Thursday, along with financial sector heavyweights retail broker Charles Schwab, and Alliance Financial, as well as drug maker Novartis.

Friday could very well prove to be the biggest market-moving day from an earnings perspective. Citigroup and Bank of America headline the day's earnings offerings, which is also expected to feature General Electric, toymaker Mattel, newspaper conglomerate Gannet, and Datalink Corp.

Meanwhile, the debate over the economy continues, with reports due this week on retail sales and inventories on Wednesday, industrial production and the consumer price index on Thursday, and consumer sentiment on Friday.