WALL STREET WEEK AHEAD
DESPITE a mediocre earnings season and signs of an overbought market, Wall Street bulls are likely to remain in control this week.
So far in this earnings season, 352 companies in the S&P 500 have reported results, of which only 63 percent have beaten Wall Street estimates. This compares to a beat rate of about 70 per cent on average for the past four quarters and would be the lowest since the fourth quarter of 2008.
Usually, strong earnings are associated with stock market rallies and improved investor sentiment. But despite this season’s relatively weak results, the S&P is up nearly 7 per cent for the year, and the index has posted gains for every single week in 2012, except for a 0.2 percent loss last week.
There are a number of catalysts that have helped the market this year, including a slew of improved economic data and the Federal Reserve’s vow to keep interest rates low.
Fed Chairman Ben Bernanke last week reiterated his plans to hold interest rates at record lows until late 2014. Many economists were looking to see if Bernanke might waver on that stance after news that hiring surged in January and the unemployment rate fell to a three-year low of 8.3 per cent.
Also the Institute for Supply Management said its services index rose in January to its highest since February 2011.
“Earnings upgrades by sell-side analysts tend to move in line with economic momentum, with global earnings momentum typically turning positive when the ISM new orders moves above 52,” said Credit Suisse Group AG’s analyst Andrew Garthwaite.
“Yet, new orders are now at 57, and earnings momentum continues to be clearly negative,” he said, adding that “this was a problem but not necessarily bearish for markets.”
The S&P 500 slid 0.7 per cent on Friday, its biggest percentage decline so far in 2012 after an about-face on Greece’s debt deal ended a five-week streak of gains for equities.
Investors have anxiously awaited a bailout package for Greece so the country could avoid a messy debt default, but complications have tied up talks for weeks.
An agreement finally came last week but it was dealt a blow as Greek workers went on strike to oppose fiscal reform measures requested by the European Union and International Monetary Fund.