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Tech Sector Earnings to Pull U.S. Stock Market Higher

Stock-Markets / Tech Stocks Jul 13, 2009 - 10:16 AM GMT

By: Money_Morning

Stock-Markets

Best Financial Markets Analysis ArticleWilliam Patalon III writes: Stock investors will key next on earnings from tech giant Intel Corp. (Nasdaq: INTC) and banks including J.P. Morgan Chase & Co. (NYSE: JPM) for hints of what to expect in the third quarter -- and how badly the recession hurt businesses in the second quarter. The Standard & Poor's 500 Index and Dow Jones Industrial Average declined for the fourth straight week last week - the longest string of losses since stocks hit their low point in March - and investors are looking at the tech sector to squelch the ongoing decline.


The Nasdaq Composite Index lost 2.47% in the week ended Friday.

Earnings reports this week from computer-chip giant Intel and several big banks - including JPMorgan Chase & Co. - could provide investors and economists some insights on where the U.S. economy appears to be headed. Earnings are expected to improve over the last quarter, even though they'll still be down substantially on a year-over-year basis, Binky Chadha, chief U.S. equity strategist at Deutsche Bank AG (NYSE: DB), told MarketWatch.com, "A necessary condition for the markets to go up from here is that earnings have to deliver, and we need a dissipation of the uncertainty about earnings," Chadha said.

Year-over-year (annual) earnings comparisons are typically the financial yardstick that analysts use to assess whether the U.S. economy is growing or declining, meaning that "sequential" (quarter-to-quarter) earnings aren't as crucial. This time around, however, the quarterly numbers may be viewed as important because they might give a better picture of the economy's health.

During periods of extreme uncertainty, earnings estimates for companies tend to be widely dispersed - a function of investors not really knowing what to expect. That's particularly true right now of banks and financial-services companies - and companies that derive most of their income from discretionary consumer spending.

And that makes sense, given that those are the two most uncertain portions of the U.S. economy - thanks to the ongoing global financial crisis and a jobless recovery that is badly crimping consumer confidence.

After mounting one of the strongest surges in history from their March lows, U.S. stocks have fallen back in recent weeks as investors dealt with a growing realization that the U.S. economy - and its counterparts abroad - won't rebound with the speed or strength that had been widely expected. Further evidence of this came on July 2, when a U.S. payrolls report said the economy had lost more jobs than had been expected.

Against that backdrop, analysts and other investors are looking to the U.S. high-tech sector to pull the economy out its doldrums, Money Morning recently reported as part of its mid-year forecast series. Thomson Reuters predicted that S&P 500 earnings will decline by 36% from last year's levels, with financials (-53%) leading the way and techs (-24%) performing better than other sectors. This should represent the eighth-straight quarterly decline, though analysts seem more concerned about the ensuing management comments on future operations, since that will shed some light on where the economy is headed.

When Intel reports tomorrow (Tuesday) analysts expect to see that /quotes/comstock/15*!intc/quotes/nls/intcsecond-quarter sales and earnings plunged, but some analysts believe demand may be returning to the battered market following a sharp slowdown in demand for high-tech goods. Internet-search juggernaut Google Inc. (Nasdaq: GOOG) will report on Thursday.

Other firms that report this week include Goldman Sachs Group Inc. (NYSE: GS), Bank of America Corp. (NYSE: BAC) and Citigroup Inc. (NYSE: C). JPMorgan reports Wednesday.

"The market is filled with folks who want to be optimistic, but simply cannot find enough genuine reasons to buy into the market," Mike Gambale, an analyst at Informa Global Markets, told journalists. "We don't expect impressive numbers across the board, but there will be some surprises, as there always are."

Market Matters

"New and improved" was the market mantra of the week. General Motors Corp. (OTC: GMGMQ) emerged from Chapter 11 bankruptcy protection after just over a month, eager to start anew as a "new and improved" automaker.

The Commodity Futures Trading Commission (CFTC) set its sights on "new and improved" trading regulations to limit excessive speculation within the energy and other commodities markets. Some politicos are calling for a "new and improved" stimulus package to move the economy beyond the worst recession since the Great Depression. A "new and improved" Public-Private Investment Program (PPIP) was scaled back dramatically as selected managers will begin purchasing toxic assets from ailing banks. Unfortunately, as the week progressed, investors did not seem too keen on these "new and improved" developments.

Despite harsh protests by consumer groups and creditors, new GM reopened for business, "leaner and meaner" than ever. A judge's ruling allowed the once-bankrupt company to sell its performing assets to a new government-controlled entity (thanks to a $50 billion "investment" by taxpayers).

The government then shifted its attention to the regulatory world and announced plans to propose trading restrictions on certain commodities and increase the oversight over risky derivative products that have proven so detrimental to the financial markets.

The widely anticipated earnings season got started as Alcoa Inc. (NYSE: AA) reported another quarterly loss (with better-than-expected numbers) and oil giant Chevron Corp. (NYSE: CVX) warned that its results would be hindered by poor refinery operations and a weak dollar.

Investors have taken a more cautious approach heading into the new (but not improved) earnings season, particularly after last week's pessimistic labor data.

Stocks fell throughout the week and fixed income again became beneficiary of safe-haven trades. The tech-heavy Nasdaq now remains the only major domestic stock index "in the black" for the year. Fickle energy traders suddenly turned bearish, as well, as the weak economic data implied that oil demand would be curtailed for the foreseeable future (or, at least, until 2013 according to Organization of the Petroleum Exporting Countries' "2009 World Oil Outlook"). Crude oil plunged beneath $59, or more than 10% during the week, on ongoing economic concerns, although consumers ultimately may be recipients of cheaper gas prices.

Market/ Index

Year Close (2008)

Qtr Close (06/30/09)

Previous Week (07/03/09)

Current Week (07/10/09)

YTD Change

Dow Jones Industrial

8,776.39

8,447.00

8,280.74

8,146.52

-7.18%

NASDAQ

1,577.03

1,835.04

1,796.52

1,756.03

+11.35%

S&P 500

903.25

919.32

896.42

879.13

-2.67%

Russell 2000

499.45

508.28

497.21

480.98

-3.70%

Global Dow

1526.21

1,629.31

1,608.29

1,561.11

+2.29%

Fed Funds

0.25%

0.25%

0.25%

0.25%

0 bps

10 yr Treasury (Yield)

2.24%

3.52%

3.50%

3.30%

+106 bps

Economically Speaking

Talk of a second stimulus surfaced this week, with several leaders - including U.S. Vice President Joe Biden and investing icon Warren Buffett - stating that the Obama administration's $787 billion stimulus isn't enough to jumpstart the U.S. economy.

On the other hand, Senate Majority Leader Harry Reid, D-Nev., believes the plan needs more time to work through the system as only 10% or so has even been distributed thus far. Economists seem to agree with "Hank," as the latest Wall Street Journal survey reported that over 80% of respondents feel that the country does not need a new round of stimulus in the current environment. Still, the "Oracle of Omaha" painted an optimistic picture of the future by stating that the United States is "going to come out of this better than ever, the best days of America lie ahead but not next week or next month."

On the global front, the International Monetary Fund (IMF) revised - upward - its forecast of economic growth for 2010 and confirmed its belief that the developing economies in China and India will greatly contribute to the global rebound.

The May trade balance highlighted a slow week of data as the deficit declined to its lowest level since late 1999 and the weak labor market helped reduce consumer demand for foreign goods.

While initial claims for unemployment benefits fell to levels not seen since the beginning of the year, continuous claims (those folks who remain on the unemployment rolls for over a week) rose by another record amount.

In other words, no matter how one dissects the numbers, the labor picture looks dire and may not begin to improve for some time. As such, the latest University of Michigan consumer sentiment reading dropped for the first time since February, another sign that the optimism of the past few months may be fading fast.

[Editor's Note: If you're new to the commodities-investing arena, and are uncertain about the landscape - or even if you're an "old hand" at natural-resource stocks, but want some insights into the new profit plays and new players - consider hiring a guide: Money Morning Contributing Editor Peter Krauth, a recognized expert in metals, mining and energy stocks, is also the editor of the Global Resource Alert trading service, which ferrets out companies poised to profit from the so-called "Secular Bull Market" in commodities. A former portfolio advisor, Krauth continues to work out of resource-rich Canada, which keeps him close to most of the companies he researches. Against the growing global financial malaise, Krauth says that commodities are among the most-profitable and least-risky investments available, and notes that this may well be the most powerful bull market for commodities we'll see in our lifetime. He makes a strong case. To read more about his strategies, and the sector plays he likes the most, Please click here. ]

Weekly Economic Calendar

Date Release Comments
July 6 ISM - Services (06/09) Contraction, but best showing since September 2008
July 8 Consumer Credit (05/09) 4th straight monthly decline in borrowing
July 9 Initial Jobless Claims (07/04) Best showing since Jan, though labor remains weak
July 10 Balance of Trade (05/09) Fell to lowest level since November 1999
The Week Ahead
July 14 PPI (06/09)
Retail Sales (06/09)
July 15 CPI (06/09)
Industrial Production (06/09)
July 16 Initial Jobless Claims (07/11)
July 17 Housing Starts (06/09)

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