4Q earnings could indicate economy's direction

4Q earnings could indicate economy's direction
Sunday January 18, 9:37 pm ET
By Tim Paradis, AP Business Writer
Wall Street looks to week's big earnings to help answer questions about economy's direction


NEW YORK (AP) -- As hundreds of fourth-quarter earnings reports stream in this week, Wall Street's reaction will turn on companies' answers to one question: When will the recession end?
"Not soon" is what the market heard last week. Big banks posted ugly numbers and told investors they were still struggling with rickety balance sheets. That revived fears that the economic recovery that some analysts have forecast for the second half of the year won't materialize.

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The market has largely written off the first half of 2009. Now, stocks could take a beating if companies lead investors to believe a recovery will be pushed back to 2010.

Of the 42 companies in the Standard & Poor's 500 index that have reported results for the October-December quarter, 25 have fallen short of Wall Street's already reduced forecasts, according to S&P.

But some analysts believe that investors, who buy and sell based on how they think the economy will be faring six to nine months from now, will eventually stop reacting negatively to disappointing data.

"There will be more bad economic news. I don't think we're out of the woods on layoffs and earnings announcements but at some point it's all factored in," said John Dorfman, chairman of Thunderstorm Capital LLC in Boston.

He said the 50 percent drop in the S&P 500 index from its October 2007 high to an 11-year low on Nov. 20 gives him hope that the market will start to look past bad news and find early signs the economy is stabilizing.

"The sentiment is now so gloomy," he said. "It's the natural turning of the economic cycle. It's mysterious when it's going down. You think 'How can it ever turn?' But it always does."

This week, the range of industries issuing reports and 2009 outlooks is broad, from technology companies to airlines to regional banks. Google Inc., United Airways parent UAL Corp. and US Bancorp all plan to release results. Big names including General Electric Co., Microsoft Corp. and Johnson & Johnson are also due and, more important, so are their comments about the state of their businesses.

It's a shortened week with markets closed Monday for Martin Luther King Jr. Day. And Tuesday some of investors' attention will be diverted to Washington with the inauguration of President-elect Barack Obama.

The new administration could give stocks a bounce, market watchers say, as Obama prepares to dispense the second half of the government's $700 billion financial bailout fund and awaits passage of an $825 billion stimulus package that is fast making its way through Congress.

"I think the inauguration will give people a little more confidence," said Harry Clark, president and chief executive at Clark Capital Management in Philadelphia.

Wall Street last week saw a continuation of the selling that began on Jan. 5, a pullback fed by investors' renewed realization that the economy and corporate profits remain very weak. Despite an uptick Thursday and Friday, the S&P 500 index lost 4.5 percent over the week.

Investors could get a break this week from the drubbing because major financial companies like Citigroup Inc. and Bank of America Corp. have already delivered the bad news. Citigroup on Friday said it lost $8.29 billion in the fourth quarter -- its fifth straight deficit -- and that it was splitting the company in two to help restore profits.

And investors will look at overseas markets, which are open Monday. The British government said Sunday it was pumping another more money into its banking system to try to revive lending.

Clark thinks the news will continue to be grim but that a recovery will come sooner than most investors expect because the economy is already 13 months into a recession. Even the toughest recessions don't usually last longer than 16 months.

Clark cautioned that there is still risk of a shock like the failure of another big financial firm, like the fall of Lehman Brothers Holdings Inc. in September. That could upend the relative orderliness seen in trading since late November.

But he also said earnings reports could offer a reminder that not all industries are suffering as much as banks and that a recovery is possible. Industries like health care and consumer staples are holding up well compared with banks.

With little in the way of economic data due during the week -- a government report on housing construction is due Thursday -- investors will focus on earnings.

"There will be some good nuggets," Clark said, referring to earnings reports. "The market needs a catalyst."

"We're in the bottoming process," he said, predicting the gyrations in stocks will continue as investors examine the economy.