Corporate earnings reports begin in earnest this week, and investors are expecting the season to reveal some insight into the health of...
Corporate earnings reports begin in earnest this week, and investors are expecting the season to reveal some insight into the health of the economy and the stock market.
About two dozen companies in the Standard & Poor’s 500 index are expected to issue quarterly reports during the week, including General Electric, one of the important components in the Dow Jones industrial average.
The week is also chock-full of economic reports on inflation, retail sales and the budget deficit.
GE, which reports Friday, almost always hits its earnings target, so no surprises are expected there.
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However, investors should pay close attention to what one of America’s largest companies says about the third- and fourth-quarter profit picture.
“We are looking for clues about the second half of the year,” said Charles Hill, president of Veritas et Lux, a Boston investment research firm. “There are expectations that earnings will pick up later this year, but I am suspicious of that happening.”
Earnings of companies in the S&P 500 are expected to have grown at a 7.4 percent rate in the second quarter, compared with the same period last year, according to Thomson Financial, which tracks analysts’ earnings estimates.
However, the growth rate in the third quarter is expected to jump to 15.5 percent — a pace that Hill questions.
“I don’t see why the analysts are expecting that kind of acceleration when earnings have been decelerating in the previous quarters,” he said. “That’s why I want to hear from the companies whether they really believe the earnings will be as good as the analysts are saying.”
The Dow and the Nasdaq composite index are both down about 3 percent for the year so far, and the S&P 500 is flat. However, the market began this week with a head of steam for a change.
It stood firm in the face of the London bombings Thursday, with the Dow up 31 points, then tacked on 146 points Friday and 70 yesterday.
If no more attacks occur, earnings come in decent, oil comes down some and the outlook from corporate America is positive, the market could still have a good year.
“I am looking for the S&P to still gain about 7 percent this year,” said Scott Wren, market analyst at A.G. Edwards in St. Louis. “For starters, I think the second-quarter earnings are understated. I think they could hit 10 percent.”
He will be closely watching the release of two economic reports Thursday for additional ammunition for his bullish stance.
He expects the consumer price index for June to again show quiescent inflation.
The CPI is a monthly measure of prices paid by consumers for a representative basket of goods and services. Economists are expecting the core CPI rate — which excludes the volatile food and energy sectors — to be a very tame 0.2 percent rise for June. This follows a 0.1 percent rise in May.
Low inflation bodes well for the stock market because it means interest rates will remain low. That keeps borrowing costs low for consumers and companies.
Also Thursday, the Commerce Department releases its monthly report on retail sales. Analysts are expecting a 1 percent increase.