by Shawn Narancich, CFA Vice President of Research Earnings: Week Two Stocks tacked on another 2 percent in week three of the new year, and are now trading at levels not seen since last summer. Fourth-quarter earnings are now in full swing, with over 12 percent of the S&P 500 having reported. A plurality of companies has exceeded expectations, but more are missing compared to recent quarters. Citigroup, Capital One, and the trust banks fell into the latter camp and were punished accordingly. Yet, despite the decidedly mixed results for financials, the group again outperformed as institutional investors appear to be reallocating to last year’s worst performing sector.
U.S.banks are revealing notable loan growth, and while faster Q4 economic growth is certainly to credit, balance sheet retrenchment by European peers facing enhanced capital requirements could also be boosting their market share. More generally, companies face headwinds in 2012 that didn’t exist at this time last year, including a stronger dollar, a European recession, less advantageous bonus depreciation, and pension funding headwinds. Therefore, Q4 earnings may not turn out to be the positive catalyst they have been in recent quarters.
Tech: So Far, So Good With the notable exception of Google, tech earnings are off to a solid start. The big cap triumvirate of IBM, Microsoft, and Intel all reported solid results that were well received by investors. Most enlightening were two key earnings reports from the semiconductor sector: Linear Tech and Xilinx. Both companies reported a pick-up in orders at quarter-end. For several months, chip stocks have shed bad news surpassingly well as investors speculated that the cycle had bottomed, so with evidence of a cycle turn in hand, investors greeted the news warmly, pushing the group up 8 percent. Peak earnings reports occur over the next two weeks as energy, industrial, and healthcare companies take center stage.
Macro Economic news continues to support the rally in stocks. Initial jobless claims retreated, benign consumer prices confirmed a moderating of inflation, and the Empire State Manufacturing Index came in strong. The Fed meets next week and, while policy is likely to remain static, investors are expecting enhanced communication about the rate outlook. Europe was again surprisingly quiet, with debt auctions keeping bond yields below the key 7 percent level in Spain and Italy. China reported sub-9 percent economic growth in Q4, but the numbers came in ahead of expectations and stocks rallied on the news.