Profits key if stocks are to recover

01/22/2006

Sunday January 22, 11:32 AM EST

By Vivianne Rodrigues

NEW YORK (Reuters) - Digging out of the red will be a tall order for U.S. stocks this week after Friday’s big losses unless the corporate profit picture improves and the international tensions driving oil prices through the roof ease.

Stocks ended last week with their biggest fall in nearly three years, and the magnitude and breadth of the decline could shake individual investors’ faith in the market, leading to additional selling on Monday.

Friday’s selling was a sign investors had realized weak earnings early in the week were not one-time misses but part of a larger trend, Alec Young, Standard & Poor’s equity market strategist, said.

“You never get drops of this magnitude without something serious going on,” Young said. “It’s not a pretty picture, and it clearly caught a lot of people off guard.”

Retail investors were likely to look at the selling and push the market lower on Monday, Young said.

U.S. benchmark stock indexes had their first weekly decline this year, and the blue-chip Dow erased its 2006 gains after bellwethers General Electric Co. (GE) Intel Corp. (INTC) and others reported profits that were lower than expectations.

“Investors are having to deal with the reality of lower corporate profits,” said Michael Strauss, chief economist at Commonfund in Wilton, Connecticut. “And the stock market is starting to feel that impact.”

For the week, the Dow shed 2.7 percent to 10,667, the S&P lost 2.0 percent to 1,261 and Nasdaq ended 3 percent lower at 2,247.

OIL A BIG DRAG

Strauss also said a rise in oil prices above $68 a barrel may dampen demand for stocks as it rekindled inflation and earnings worries. High oil prices can act as a tax on consumption, hurting consumers’ ability to spend as well as corporate profits.

U.S. crude prices gained 2.2 percent to $68.35 a barrel on Friday in New York after al Qaeda threats added to worries about supplies from crude exporters in Iran and Nigeria. Oil prices have gained 23.4 percent since their five-month low of $55.40 hit in mid-November.

“Oil shouldn’t be trading above $65 a barrel,” Strauss said. “It constrains the whole market and only some energy utility shares benefit.”

EARNINGS WORRIES

Earnings at companies in the Standard & Poor’s 500 index were projected to have risen 14 percent for the fourth quarter of 2005 before the reporting period began, according to Reuters Estimates. Of the S&P 500 companies that reported earnings before Friday, earnings per share for about 60 percent have exceeded expectations.

Still, some analysts have tempered their views after weak results and disappointing outlooks from tech heavyweights such as Intel and Yahoo Inc. (YHOO).

“We’re finding earnings are very spotty,” said Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vermont. “One day we’re good, one day we’re bad, the market’s choppy.”

This week will bring earnings from about 150 S&P 500 companies, making it the busiest reporting week. The companies include Microsoft Corp. (MSFT), American Express Co. (AXP), 3M Co. (MMM), General Motors Corp. (GM) and Johnson & Johnson (JNJ). Other highlights include Bristol-Myers Squibb (BMY), Qualcomm Inc. (QCOM) and Sun Microsystems Inc.

(SUNW).

GDP, HOUSING REPORTS

On the economic front, an advanced GDP report on Friday is likely to show the U.S. economy expanded at a 3.1 percent annual pace in the fourth quarter of 2005, down from 4.1 percent in the previous three months.

Other economic gauges this week include new orders at U.S. factories in December, due to be released on Thursday.

Also this week a report on existing home sales, due on Wednesday, is forecast to show a drop to 6.9 million sales in December, which would make it the third consecutive monthly decline.

U.S. new home sales are also expected to have fallen in December. A report is due on Friday.

Symbol Last Trade Change
DOW
10,667.39
-213.32

NASDAQ
2,247.70
-54.11

S&P 500
1,261.49
-23.55