Wall St Week Ahead – Will corporate earnings justify gains?

By Chuck Mikolajczak

NEW YORK, April 8 (Reuters) – Investors will look to
corporate profits and outlooks next week for confirmation the
S&P 500 has another leg to its rally as the earnings season
gets under way.

Dow component Alcoa will launch the earnings season after
the closing bell on Monday in what is expected to be another
solid round of corporate results.

The aluminum producer is expected to report quarterly
earnings of 27 cents per share on revenue of $6.07 billion,
according to Thomson Reuters estimates.

Some top financial names are also expected to report next
week, including JPMorgan Chase & Co (JPM.N: Quote, Profile, Research) and Bank of America
Corp (BAC.N: Quote, Profile, Research). Google Inc (GOOG.O: Quote, Profile, Research) is also due to report.

“Earnings are what the market is all about. Earnings are
critical in here, guidance is critical in here, the conference
calls are critical in here,” said Paul Mendelsohn, chief
investment strategist at Windham Financial Services in
Charlotte, Vermont.

“In terms of earnings and sectors, you basically want to be
with those people who have the ability to raise prices or are
participating in the commodity price increases,” he said. “And
you really don’t want to be in those people who have the input
costs increases and are going to see their margins squeezed by
rising commodity prices.

Market analysts have found encouragement for a strong
earnings season from the relatively light amount of company
preannouncements, leading to the belief that surging commodity
costs have yet to compress margins and impact corporate
profits.

The Reuters/Jefferies CRB index rose 8 percent in the first
quarter and is up 2.6 percent so far in April, and hit its
highest level since September 2008.

The S&P 500 (.SPX: Quote, Profile, Research) has recouped all of the losses suffered
in the wake of the Japanese earthquake on March 11 but has been
unable to convincingly muscle past the 1,333.58 level, a
technical resistance point representing double the 12-year low
hit on March 9, 2009.

The benchmark index was relatively flat for the week, down
0.3 percent, as the prospect of a government shutdown kept the
rally at bay.

Investors braced for a possible government shutdown as the
White House and Congress scrambled on Friday to break a budget
impasse ahead of a midnight deadline. But analysts said that
while a U.S. government shutdown, which would idle hundreds of
thousands of federal workers, would be short-term negative, the
market had managed to rally even ahead of the looming deadline.
For details, see [ID:nN08144565]

“There is an intellectual concern of what it means to shut
down the government and there is the uncertainty of how long
does the government get shut down and how much of a (hit) do we
take on GDP growth,” said Phil Orlando, chief equity market
strategist, at Federated Investors, in New York.

Many traders circled short-term puts on the SPDR S&P 500
Trust (SPY.P: Quote, Profile, Research) as the prospect of a shutdown loomed.

Shares of the exchange-traded fund, also called the
Spyders, fell 0.3 percent to $132.86 in afternoon trading on
Friday. The fund’s Weekly $133 puts traded more than 96,000
contracts, surpassing their open interest.

Frederic Ruffy, a strategist at WhatsTrading.com, said the
positions likely reflected hedges against weakness due to fears
of a shutdown.

Investors will also eye a batch of economic data next week,
providing more insight into the the economic recovery,
including the consumer and producer prices indexes, the
Reuters/University of Michigan consumer sentiment index and the
Federal Reserve’s Beige Book of economic activity.

“The inflation numbers will certainly be important —
producer price index and consumer price index — the
expectation is inflation will be higher than the Federal
Reserve will feel comfortable with,” said Hugh Johnson, chief
investment officer of Hugh Johnson Advisors LLC in Albany, New
York.

“The focus next week will clearly be on the earnings
numbers and the economic numbers and that is where the focus of
the market should be.”
(Additional reporting by Doris Frankel; Editing by Leslie
Adler)

(Wall St Week Ahead appears every Friday. Questions or
comments on this column can be e-mailed to:
[email protected])

Wall St Week Ahead – Will corporate earnings justify gains?