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World Week Ahead: It's in the earnings

Monday 25th October 2010

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More than 150 US companies will report earnings in the next five days including Exxon Mobil, Chevron and Microsoft as the third-quarter results season takes off.

So far, the news has been good, and that has helped underpin the rally in equities. Of course the biggest reason for the rally is heightened expectations that the Federal Reserve will detail another round of asset purchases.

One week further down the road to the next quantatitive easing, investors have a sense that the Fed is leaning towards a monthly target in the $US100 billion range for a six-month period, giving it the flexibility to prove its readiness to act and yet not tying its hands to a specific total amount.

Final details will be agreed when the policy committee of the Fed meets next week. Until then, investors will be focused on earnings and additional economic data, including the first of three readings on US third-quarter gross domestic product.

Wall Street posted its third consecutive week of gains by the close of trading on Friday, though last week’s advances were somewhat muted by the pullback linked to China’s decision to increase interest rates.

For the week, the Dow Jones Industrial Average and the Standard & Poor’s 500 Index each rose 0.6% while the Nasdaq Composite gained 0.4%.

“The market is telling us it’s not all doom and gloom,” chief executive of consulting firm IHS Nariman Behravesh says. “Earnings are very good in many parts of the economy.”

About 85% of companies in the S&P 500 gauge have exceeded analysts’ per-share profit estimates so far in third- quarter reports. Sales are rising at companies from Boeing to chipmaker Intel and railroad CSX. Faster overseas growth is also boosting earnings.

“Earnings, for the most part, have indicated the economy still remains very healthy,” Robert Stimpson, a money manager at Oak Associates, says.

In the last week of October, 177 S&P 500 companies are due to report their balance sheets, of which seven are Dow components. Among them are energy giants Exxon Mobil and Chevron and technology giant Microsoft.

When all is said and done for this earnings season, S&P 500 earnings are expected to have booked a 28% increase from a year ago, according to Thomson Reuters data.

Better than expected results from IBM, Honeywell, Intel Corp and Google Inc, among others, have helped the technology sector pace the recent equities rally.

The Nasdaq is up more than 17% since the end of August compared with the S&P 500, which is up 12.7%. The Nasdaq closed just shy of its highest level since May on Friday.

While there is some solid, general, momentum in the market, investors continue to show disappointment at the slightest miss. Last week Apple Inc reported stellar results, except that investors expected even more, in particular more sales of its iPad.

Managing expectations is always a challenge and it's proving moreso in the current environment where optimism can turn to pessimism at the drop of a pin.

“It’s going to be very specific going forward,” Greg Woodard, a strategist at Manning & Napier in Fairport, New York, told Bloomberg.

“Some of the macro headwinds are really going to separate the winners from the losers in terms of individual companies,” Woodard added. “The earnings have offset what continues to be a lot of macro worries.”

Among those worries is the state of the world’s biggest economy. This week there’ll be a few more measures on its health.

On Friday, the Commerce Department will release the GDP report. It is expected to have risen at a 2% annual pace, up from 1.7% in the second quarter, according to a survey by Bloomberg.

Key to the outlook is consumer confidence, and spending, despite a stagnant labour market.

Existing home sales and durable goods orders, also set for release this week, will also shed some more direct light on the performance of the housing and manufacturing sectors.

One potential dark cloud is the uneasy truce reached at the G20 meeting in South Korea on the weekend. It’s far too early to say that another currency skirmish won’t derail investor optimism and the global economic recovery.

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