By William L. Watts, MarketWatch
NEW YORK (MarketWatch) -- Wall Street weathered the first four days of the government shutdown little worse for wear,
but Washington's budget impasse might be harder to shake off this week, even as investors look ahead to the launch of
The S&P 500 (SPX) rebounded Friday, cutting its weekly loss to less than 0.1%. The Dow Jones Industrial Average (DJI)
ended with a 1.2% weekly decline. Both indexes experienced some bouts of heavy selling as the shutdown took hold, but
managed to rebound.
Investors are well aware that past shutdowns have tended to inspire pullbacks that ended up being buying
opportunities, said Carmine Grigoli, chief investment strategist at Mizuho Securities. In fact, a shutdown that extends
beyond 10 days could trigger a pullback of around 5% or so. History indicates the drop would mark a good time to buy, he
"That message has been clearly sent" to investors and portfolio managers, Grigoli said in an interview. "That's why
we've seen one-day downdrafts" followed by renewed buying interest. See: Shutdown jolts market's fear gauges: 6 charts.
Meanwhile, if the shutdown drags on, it will threaten to steal the thunder from the start of earnings season, which
begins in earnest on Friday with results from Dow Jones component J.P. Morgan Chase & Co. ( JPM ) and Wells Fargo & Co.
( WFC ) .
Analysts have slashed their earnings forecasts for J.P. Morgan, Citigroup ( C ) , Morgan Stanley ( MS ) , and Goldman
Sachs Group Inc. ( GS ) over the past month, largely on expectations the banks' post-crisis earnings boom is coming to an
end as a sluggish recovery lumbers along.
More broadly, analysts expect S&P 500 earnings to grow 3% year-on-year in the third quarter, with the financial sector
leading the way and energy firms lagging other sectors, according to FactSet.. That's a step down from the beginning of
the third quarter, when forecasters penciled in growth of 6.5%.
On the top line, analysts are looking for revenue growth of 2.6% for the third quarter. That's also down from
expectations on June 30, when analysts were looking for revenues to expand by 3%.
Moreover, FactSet noted that 90 companies in the S&P 500 had issued negative earnings guidance, which the data
company said would be the highest figure since it started tracking guidance data in 2006. At the same time, 19 companies
have offered positive guidance, which would be the lowest number since FactSet started collecting the data. See: Ahead
of earnings season, negative news dominates.
Analysts at Pavilion Global Markets in Montreal said they expect corporate results to show that past earnings growth
was very slow, and they noted that profit is on track for a 10th consecutive quarter of growth less than 10%. Meanwhile,
the growth outlook for the fourth-quarter remains "extremely lofty" at 24.8%, they said, which means investors should
prepare for a heavy round of fourth-quarter profit warnings.
"Profit warnings and policy uncertainty are poised to maintain pressure on equities over the next month," they said.
But Barry Knapp, head of U.S. equity strategy at Barclays, offered a more upbeat outlook. He argued that earnings
growth likely hit its low point in the third quarter of last year at roughly 0% year-on-year.
That will make for easier year-on-year comparisons as third-quarter 2013 earnings roll in, Knapp said in a note. Knapp
said he expects the practice of "beat and lower," in which companies top forecasts while lowering their forecasts, to
"With leading indicators of domestic and international earnings growth--ISM and global manufacturing PMIs ----
improving throughout the quarter, we expect more-than-average potential upside to results," Knapp said.
He noted that headline earnings growth of roughly 6% in the second quarter was "low quality," driven by the release of
large bank reserves, while non-financial companies saw growth of just 1%. An important improvement, however, came on the
top line as sales rose around 2.5% in the second quarter, he said, versus close to no growth in the first quarter.
"We will be watching revenues closely, as analysts expect continued improvement," he said.
Meanwhile, the shutdown robbed investors Friday of the September nonfarm payrolls report and threatens to this week
as well, including August trade figures on Tuesday and September retail sales data on Friday. The University of
Michigan's October consumer sentiment survey will likely attract much attention Friday for a measure of how the shutdown
has affected consumer attitudes.
Mizuho's Grigoli said investors may look to earnings data for missing clues to the economy. The focus, however, may be
on activity outside the U.S. as investors anticipate a stronger recovery in Europe.
"I think the key is what we're hearing from Europe and overseas," said Grigoli, who remains bullish on the overall
U.S. market. He is looking for the S&P 500 to trade around 1,850 by spring versus 1,690 Friday.
The divergence between "soft and hard" U.S. economic data is creating a positive backdrop for stocks, said Allan von
Mehren, chief analyst at Danske Bank in Copenhagen in a note.
Von Mehren observed that forward-looking indicators such as the Institute for Supply Management's readings for the
manufacturing and service sectors continue to point to stronger growth--a picture reinforced by the low level of weekly
At the same time, other indicators, such as car sales, were weaker in September, he noted, and gross domestic product
for the third quarter is on track for growth of just 1.5% to 2%--matching the pace of the first two quarters.
"In some ways this is a sweet spot for the stock market because leading indicators are giving optimism for equities.
But actual growth and employment are still weak, keeping the Fed sidelined" and unable to begin scaling back monetary
stimulus, von Mehren said.
Nevertheless, it's important that growth soon pick up speed in line with the leading indicators and that the forward-
looking indicators also remain upbeat, he said. That's why the government shutdown and debt-ceiling fears are
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