After a dismal week for Wall Street last week with a mixed bag of earnings from a host of companies and the tragedy of the Boston Marathon bombings, investors and traders alike are looking for a less volatile week ahead. About 170 S&P 500 and 10 Dow companies report earnings in the week ahead, and they include everything from tech icon Apple (AAPL) to industrial names like Caterpillar (CAT) and energy companies like Exxon (XOM). As of Friday, a fifth of the S&P 500 had reported, and two-thirds had better-than-expected earnings. But an unusually high amount, 57%, missed their top-line revenue estimates, according to Thomson Reuters.
In the light of these respective earnings results, the Dow finished its worst week of the year as it fell 2.1 percent to 14,547, and the S&P 500 lost 2.1 percent to 1,555. The Nasdaq was down 2.7 percent last week. IBM proved to be a major drag on the Dow last week as the company reported earnings that missed analysts' estimates by a nickel. This unheralded miss by the Dow Industrial's giant has many believing that the miss may be foreshadowing further declines for the major averages. IBM earnings, in fact, have served as a highly efficient proxy for market movement going all the way back 10 years, according to research from Bespoke Investment Group. The company's stock movement immediately after earnings has had a remarkable 75% success rate in predicting market movement over the next five weeks. "Part of the explanation lies in the fact that IBM generates more than half of its revenues from its services unit, which has a presence in practically every S&P 500 company," Bespoke said. "Any weakness in the performance of corporate America (or even the corporate world) will likely show up in the results of IBM." Here is a look at companies reporting earnings on Monday April 22nd: Caterpillar , Halliburton (HAL), Hasbro (HAS), Six Flags (SIX), Netflix (NFLX), Texas Instruments (TXN), Crane (CR), ACE Ltd. (ACE), B/E Aerospace (BEAV), Hexcel (HXL), Zions Bancorp (ZION), Checkpoint Systems (CKP) and Philips Electronics (PHIA-NL).
As it tends to be a bell weather indicator for the global economy, the markets may take their lead from Caterpillar's results on Monday. Since the start of the year, analysts have cut first-quarter profit estimates for Caterpillar by 26%, according to FactSet Research, and there's concern the company may be forced to lower its 2013 outlook. The chief reason is Caterpillar's China business is slowing, plus mining companies are pulling back on spending for new equipment due to declining prices for commodities like coal and iron ore. Caterpillar is forecast to earn $1.36 a share, down 43% from the same 2012 period, while sales are projected to decline 14% to $13.8 billion.
As earnings will likely remain in focus next week, investors will also digest all too important economic data. Housing data will be delivered on Monday and Tuesday. While many investors cling to improving data from the housing sector, the industry simply isn't big enough to drive the economy any more. Later in the week, investors will get the results for March Durable Goods orders and a first look at Q1 GDP on Friday. The durable-goods report for March will offer further clues about business investment, a much bigger source of growth than the housing market. Undoubtedly, the marketplace will be a buzz with predictions for the strength of the economy all week long leading up to Friday when the GDP data will be released. Expectations for Q1 GDP remain at 3% according to Factset Research.
Investors and market strategists alike have been waiting patiently for a market pullback while the markets have steadily climbed higher throughout the majority of the year, until recently. "By any sort of measure, we're kind of overdue for some sort of a pullback, and maybe we're finally going to get it," said Bill Stone, chief investment strategist at PNC Wealth Management. Year to date, the S&P is up 9% and it has not had a significant pullback. Stone also noted that the economic data had been disappointing. On Friday, the Philly Fed Manufacturing data came in far worse than expected, following an already released Empire State Index which proved to be disappointing as well. The Philly Fed bank's business-conditions index edged down to 1.3 from 2.0 in March. Economists polled expected the index to rise to 4.0. The Fed reported that the index for new orders fell to negative 1.0 in April from 0.5 in March.
While the data has certainly come in weaker than expected, G-20 officials have taken notice and in a joint press release on Friday, the committee of economic policy makers said the world must take more action to help spur demand. "Much more is needed to fulfill our commitment to address the ongoing weakness in the global economy," the G-20 said. This message came on the heels of last week's IMF meeting where the group lowered its estimate of U.S. and global economic growth as part of its world economic outlook the organization publishes twice a year. The IMF now sees global growth of 3.3% in 2013 and 4% in 2014 and U.S. growth of 1.9% this year and 3% in 2014. The respective forecasts represent declines of 0.2 percentage points in 2013 and no change in 2014.
It is anybody's guess as to whether or not the U.S. major indices will undergo a normal correction period in the coming days and weeks, but economic data and earnings results will certainly serve to guide the markets. As noted, next week will be filled with earnings and economic data. The vigilant investor will likely be rewarded.