Earnings, Fed expected to prove sceptics wrong.
A spike in bond yields has brought Europe's debt crisis back to the forefront. U.S. economic figures point to steady-but-uninspired growth, and stocks have backed off the sharp gains that recently pushed indexes to near four-year highs. Stocks returned a bit to their winning track this week after strong earnings reports, and investors are waiting to see if more positive surprises from United States companies are in store.
Nearly 180 of the S&P 500's components will report earnings next week, and heading into a seasonally weak period, the market will need strong reports to offset the perception that there's no more room to rally. "It is very encouraging that the majority of the news flow is about earnings rather than Europe," said Leo Grohowski, who oversees about $171 billion in client assets as chief investment officer at BNY Mellon Wealth Management in New York.
Earnings are "alleviating our concerns about economic growth and making us feel more comfortable about our estimates for the year." Next week will see earnings releases from several bellwethers. The most important will likely be Apple, which reports after the market close on Tuesday.
While the largest US company by market capitalisation has a history of blowout quarters, many say the company's meteoric rise so far this year has created unrealistic expectations.
For the first time since December 2008, the stock fell more than 4 per cent in back-to-back weeks.
Analysts see double-digit earnings growth for the S&P's financial and consumer discretionary sectors in 2012, with industrials close behind. All three are cyclical growth sectors, while sectors that tend to lead at the end of a growth cycle and before corrections are expected to slow.
Still, worries remain about Europe, where bond yields have been rising to ominous levels. And with investors skeptical of the S&P's nearly 30-per cent surge since its October low, the 'sell in May, go away' adage could prove prophetic.
A trend of buying into the market's weakness was recently broken, indicating investors might be ready to capitulate. The S&P has closed near its lows on recent down days, while positive sessions have ended well below their highs.
"We don't see the type of buying that will cause the market to slow its pullback," said Joseph Greco, managing director at Meridian Equity Partners in New York. "There's no conviction buying."
Chart watchers are starting to bet the S&P 500 is about to pull a repeat performance of 2010 and 2011, when a mid-year pullback followed an April peak, and that smart investors are selling US stocks after highs reached earlier in the month.
"Seasonality is important, and it does make a discernable pattern. You can follow it, but it can also make you look foolish if you hew to it too closely," said David Joy, chief market strategist at Ameriprise Financial in Boston, where he helps oversee $571 billion in assets.
"The economy is on a better footing now than last year or at any time since the start of the recovery," he said. The early 2011 market rally faded after a quake and tsunami in Japan, which has the world's third-largest economy.
And after a large drop triggered by the downgrade of the US credit rating, the S&P rallied to close the year flat.
"It isn't a stretch to say the downgrade won't happen again this year, or that the number of exogenous shocks will be fewer," said Andrew Slimmon, managing director of global
investment solutions at Morgan Stanley Smith Barney in Chicago.
"In addition, the result of those shocks was a fear that the economy was going to slip back into recession. I don't believe that's the case this year."
Kenneth Fisher, the billionaire investor who oversees $43 billion at Woodside, California-based Fisher Investments, said the current economic environment was "as beautiful as I have ever seen it," and that 2012 would be 'a super big year' for equities.
So far, with 23 per cent of S&P 500 companies having reported results, more than four-fifths have beaten expectations, topping consensus forecasts with an average surprise factor of 8.8 per cent. Profit growth in this quarter has been up 6.2 per cent,
according to Thomson Reuters Proprietary Research.
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Muscat Press and Publishing House SAOC 2012
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