Saturday, October 19, 2013

Shutdown threatens to overshadow earnings

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 earnings season.

The S&P 500 (SPX)  rebounded Friday, cutting its weekly loss to less than 0.1%. The Dow Jones Industrial Average (DJIA)  ended with a 1.2% weekly decline. Both indexes experienced some bouts of heavy selling as the shutdown took hold, but managed to rebound.

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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 said.

"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.

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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.

Click to Play The Next 24: Economic held back by shutdown

J.P. Morgan kicks off earnings season - and thank goodness for that, because there may be a very empty economic calendar to trade off. And Alcoa, Yum Brands, Wells Fargo are set to report next week. Laura Mandaro has the Next 24.

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.

Newscast: Budget impasse upside- no taper?

The benchmarks are edging slightly higher, as Alisa Parenti reports.

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 continue.

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