It’s earnings versus Europe for stocks
NEW YORK — Stock investors will return to a tug of war between signs of domestic strength and overseas concerns this week as a batch of critical earnings reports look to add credence to the idea the economy is improving, while credit rating downgrades in Europe will keep that region's difficulties in view.
Bank stocks will probably once again be a primary focus, as not only will European issues call the group's profit outlook into question, but many key names report results.
Equities have recently undergone a decoupling with respect to Europe's sovereign debt crisis as signs of progress in the euro zone, along with improving US data, have pushed Wall Street higher on improved growth prospects. Financials have been a beneficiary of that rising tide, with Bank of America up 22 per cent since the start of the year.
So far this month, the S&P 500 SPX is up 2.5 per cent, while the Dow DJI is up 1.7 per cent and the Nasdaq is up 4.1 per cent.
"We're going to see more volatility in the weeks ahead with tension between earnings and Europe," said Christopher Sheldon, the Boston-based director of investment strategy at BNY Mellon Wealth Management, which oversees $171 billion globally.
"We want to
see Europe resolved, but there will continue to be ups and downs, and while earnings will continue to be relatively good, we do expect slowing compared with 2011."
However, the uncertainty about Europe returned in a big way on Friday after Standard & Poor's downgraded the ratings of several euro-zone countries, including Italy, after the market closed. Talk of the downgrades spurred a sell-off that erased most of the gains for the week, when the S&P rose for four straight sessions. merous bellwethers could reinforce the growth story. Bank of America Corp, General Electric Co, Intel Corp, Goldman Sachs Group Inc and Microsoft Corp are among the names set to report.
Early reads have supported the idea that better times lie ahead. Jpmorgan Chase & Co said the domestic economy was strengthening even as its profit fell 23 per cent, while Alcoa Inc rallied earlier in the week after giving a bullish outlook for the aluminium sector.
"Banks will be an important part of the story, especially with Europe in the picture, and investors will also be looking at names like GE, which have global exposure, to see what insights can be gleaned from that," said Herrman, who helps oversee $90 billion in assets.
This week, when markets will be closed tomorrow because of the Martin Luther King holiday, will also see the release of the New York Fed's January manufacturing data, December readings on inflation from both the Producer Price Index and the Consumer Price Index, as well as December housing starts.
For the week, the Dow rose 0.5 per cent while the S&P 500 gained 0.9 per cent and the Nasdaq added 1.4 per cent. — Reuters