By Wallace Witkowski, MarketWatch
SAN FRANCISCO (MarketWatch) -- Investors will get an early preview on whether corporate America backs a rosier
economic picture this week as key players in the S&P 500's two largest sectors -- tech and financials -- report
Of the seven Dow Jones Industrial Average (DJI) components reporting this week, four represent the tech or financial
sectors. Similarly, roughly half of the S&P 500 Index (SPX) companies reporting earnings this week fall either in the
tech or financial camp.
While some may argue the bar is always lowered for companies leading up to earnings season, performance expectations
are higher than usual following the pass investors gave many companies in the weather-beaten first quarter and stocks
trading near record-high valuations.
Stocks are coming off a rough week with the Dow industrials finishing down 0.7%, the S&P 500 off 0.9%, and the Nasdaq
Composite Index (RIXF) declining 1.6%. Even though Federal Reserve minutes revealing the central bank will end monthly
bond purchases in October provided some lift, other factors including renewed worries about Portugal and a selloff in
so-called momentum stocks put pressure on markets.
Second-quarter earnings growth for the S&P 500 stands at 4.6%. If the average "beat" over the past four years applies
to this season, we could be looking at 7.7% growth by the end of the season, notes John Butters, senior earnings analyst
at FactSet. Earnings, however, will still take a back seat to other factors.
Show me the outlook (and revenue)
"It's cliche but true...it's all about the guidance," said Nicholas Colas, chief market strategist at ConvergEx.
Also, earnings "beats" will continue to be taken with a grain of salt in favor of revenue growth, which is seen by many
as a more accurate metric of corporate health amid accounting tricks and stock buybacks.
Lately, negative guidance, while still high, has been on the decline. Seventy-six percent of S&P 500 corporate
outlooks are negative for the second quarter, compared to the 66% five-year average, according to Butters. Still, that's
well below the 84% seen in the first quarter of 2014 and the 88% in the fourth-quarter of 2013.
Colas expects the standard 65% to 70% of companies to "beat" earnings estimates this season. Other investors have
grown accustomed to this and that throws much more light on how companies have grown revenue, he said. Even so, not much
is expected in that area this quarter with most analysts banking on more revenue growth in the second half of the year.
That's evident in how revenue growth has fallen short even while earnings manage to move forward. Even with expected
4.6% growth in earnings for the S&P 500, revenue is only expected to rise 2.7% in the second quarter.
Tech: The biggest cog in the market to set the tone
With the largest total market cap of the S&P 500's 10 sectors at $3.95 trillion, this week will be a busy one for tech
earnings right out of the gate and give investors an early preview of how the second quarter fared against the weather-
beaten first quarter.
Tech companies are expected to see above-average growth compared to the rest of the S&P 500 at 7.3%. The largest cap
tech earnings this week come from Google Inc. (GOOGL) (GOOG) on Thursday.
Other highlights this week include Dow components Intel Corp. (INTC) on Monday and International Business Machines
Corp. (IBM) on Thursday. Other S&P 500 tech companies reporting earnings include Yahoo Inc. (YHOO) , eBay Inc. (EBAY) ,
SanDisk Corp. (SNDK) , and Alliance Data Systems Corp. ( ADS )
"Tech is one of those wonderful indicators," Colas said. "In aggregate, it's a great barometer of overall growth." The
sector shows a balanced picture by cutting across both consumer and business spending with continuously updating product
cycles, he said.
Financials to provide the big counterpoint
While tech is seen as an above-average performer this earnings season, financial stocks, the second-largest sector by
market cap in the S&P 500 at $3.01 trillion, are also expected to be the worst performer of the ten.
Wells Fargo & Co. (WFC) earnings on Friday showed the bank's net interest margin narrowed and mortgage business slowed
even though it posted a 3.8% rise in net income. Shares finished slightly lower after the report.
The floodgates on bank and financial earnings, however, are thrown wide open this week as a dozen major financial
companies disclose their latest numbers.
Citigroup Inc. ( C ) reports results Monday. Dow components J.P. Morgan Chase & Co. (JPM) and Goldman Sachs Group Inc.
(GS) report results on Tuesday.
On Wednesday, Bank of America Corp.( BAC ) , BlackRock Inc.( BLK ) , Charles Schwab Corp. (SCHW), Northern Trust (NTRS) ,
PNC Financial Services Group Inc. (PNC) , and U.S. Bancorp. (USB) report. Thursday sees reports from Capital One
Financial Corp. (COF) , Fifth Third Bancorp (FITB) , and Morgan Stanley (MS) among others.
Financial companies are expected to see a decline in earnings of 3.9%. It's the only sector out of ten expected to see
an overall decline, and would mark the second-consecutive quarter decline in earnings for the sector, according to
Butters. Revenue for the sector is only expected to grow by 0.7%.
Healthcare, Industrials also make an appearance
The remaining Dow components reporting this week include Johnson & Johnson Inc. (JNJ) on Tuesday; UnitedHealth Group
Inc. (UNH) on Thursday; and General Electric Co. (GE) on Friday.
Other notable earnings reports this week include Textron Inc. (TXT) , Abbott Laboratories ( ABT ), Safeway Inc. (SWY),
Yum Brands Inc. (YUM), Philip Morris International Inc. (PM), Honeywell International Inc. (HON) , and Schlumberger NV
Here's what some of the Wall Street houses reporting this week have to say about earnings season for the broader
Goldman Sachs, in addition to pointing out 22 stocks that are likely to beat earnings expectations this season, said
it will be looking out for less uncertainty from company managers, which should boost capital expenditure and mergers
and acquisitions spending. Also, look for companies where analysts have lowered earnings analysts during the quarter.
Those companies are more likely to miss those estimates, compared to those companies where analysts have not changed or
raised estimates, the firm said.
Morgan Stanley also wants to hear from management on how consumer and industrial demand has improved and how higher
oil prices might translate into costs. The firm, however, is less optimistic on a big rebound in capital expenditure
spending any time soon.
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