Focus to shift to US earnings
The start of corporate results this week could make investors look at US fundamentals
US stocks have strayed from their recent link to euro moves, and the start of US corporate earnings this week could help shift investor focus back to US fundamentals from Europe.
NEW YORK: US stocks have strayed from their recent link to euro moves, and the start of US corporate earnings this week could help shift investor focus back to US fundamentals from Europe.
Stocks have traded in line with the euro over the autumn, with both experiencing sharp swings on headlines from the eurozone.
That trend may be changing, and it comes just as investors get their first glimpse at fourth-quarter US earnings.
Aluminum company Alcoa is expected to report today after the closing bell, unofficially starting the reporting period for US corporations. Jpmorgan Chase is due to report on Friday, but the bulk of Standard & Poor’s 500 earnings will come in the weeks ahead.
“I think this month we’re probably going to break away and see the pattern of US market trade on US fundamentals rather than in reaction to the euro movement,” said Fred Dickson, chief market strategist, D.A. Davidson & Co in Lake Oswego, Oregon.
“I think we’re in a timeout period for that (US dollar) carry trade, and it will stay a time out for a while.”
The correlation between S&P 500 Emini futures and the euro, which moved in near lockstep in the fall, has receded. A 22-day moving average of the correlation shows almost no relation between the movements of the two assets.
While the corporate results will be searched for evidence of the European crisis’ impact on overseas sales, they should also bring back more of a focus on what’s happening in the United States, where the economy has been northward bound.
Friday’s US jobs reports was the latest data to suggest the recovery is gathering momentum, with non-farm payrolls rising in december and the jobless rate dropping to a near threeyear low of 8.5%.
S&P 500 fourth-quarter earnings are expected to have risen 7.8% from a year ago, according to Thomson Reuters data. But that number is down from a July 1 forecast for growth of 17.6% in the quarter.
“We’re going to need good, strong positive news on earnings to lift all three of the market averages out of their trading ranges,” Dickson said.
“They’re bumping into some overhead resistance, and it’s going to take fundamental news to do it.”
The S&P 500 ended virtually unchanged for 2011, even though most strategists had expected gains for the year.
The index has been unable to pierce through 1,285, the closing high set in late October.
Stocks ended with gains for the first trading week of the year, as the mostly upbeat US economic data offset lingering worries about the eurozone.
The Dow Jones industrial average was up 1.2% for the week, the Standard &Poor’s 500 was up 1.6% and the Nasdaq was up 2.7%.
This week’s economic calendar includes data on US retail sales and consumer sentiment.
Even with a focus on earnings, investors will be watching Italian and Spanish government bond sales this week.
Both are seen as the year’s first big funding tests for struggling eurozone countries. Italy is to pay out 100 billion euros in bond coupons and redemptions in the first four months of 2012.
“Ultimately, the market is still progressing towards a test of the (European Central Bank’s) reluctance to be a lender of last resort. I don’t know that the test will get that far, but I think it will,” said David Joy, chief market strategist at Ameriprise Financial in Boston, where he helps oversee Us$571bil in assets under management.
On the earnings front, while all 10 S&P 500 sectors have seen profit estimates cut since July, materials and financials have been the hardest hit.
Based on a July forecast, the financial sector was expected to show year-over-year growth of 36.6% in the fourth quarter, but the latest forecast is for growth of just 10.1%, according to Thomson Reuters data.
Natalie Trunow, chief investment officer of equities at Calvert Investment Management in Bethesda, Maryland, which manages about Us$13bil, said she has been overweight on US equities since the autumn and was considering shifting money into some smaller and mid-cap names.
“Additional positive momentum in the United States can offset additional negative momentum in Europe in terms of earnings impact on US companies,” she said.