World Week Ahead: Profits back in focus

World Week Ahead: Profits back in focus

By Timothy Moore

July 11 (BusinessDesk) – It’s hoped that the start of Corporate America’s second-quarter earnings season this week will provide another boost of optimism for investors, who’ve been driving equities slowly higher.

Key to that will be how investors interpret plans by both Democrats and Republicans to scale back their efforts to cut spending and rein in the world’s largest deficit as each side refuses to compromise enough on taxes. A deal could help avert the U.S. hit its debt ceiling early next month, though none has been reached yet.

Separately, there are increasing signs that Chinese authorities may have even more of a struggle to check price pressures and growth despite concerted efforts to do so. China has this past weekend reported a surge in inflation and a wider than expected trade surplus, as imports increased slower than forecast.

It’s tough to look through all of the noise.

Last week ended with a downright dismal payrolls report from the U.S. government with a mere 18,000 jobs added in June, the worst reading since September 2010, and it was far fewer than the 90,000 expected.

For the most part, however, investors seem content with their positions.

Instead of rising, volatility has dropped. For most of the last six months, the Chicago Board Options Exchange VIX has sat below the 20-point mark. There have been spikes but they’ve not lasted. And there’s no reason to think that the end is nigh.

While all three major U.S. benchmarks slid on Friday, the week was a positive one for equities. The Standard & Poor’s 500 Index edged up 0.3%, the Dow Jones Industrial Average added 0.6%, and the Nasdaq Composite advanced 1.6%.

Where markets head from here depends on Alcoa Inc which reports after the session ends on Monday as well as JP Morgan Chase & Co., Citigroup Inc. and Google Inc. as the week progresses.

The S&P 500 components are expected to show earnings growth of an average of 7.3% in the second quarter, but estimates have been lowered in the last 30 days, which Reuters reports opens the door to positive news.

"Our guess is that we'll see better-than-expected earnings and revenue, and combined with the valuation of the market, this is a compelling time to get in," Phil Dow, director of equity strategy at Minneapolis-based RBC Wealth Management, which oversees US$164billion, told Reuters.

Not everyone is so sure. Bloomberg reports that rising oil and other commodities prices combined with weakening consumer confidence may dampen profitability.

“My biggest concern is that companies continue to expect wider margin expansion throughout the rest of the year,” Jack Ablin, chief investment officer for Chicago-based Harris Private Bank, which oversees $60 billion, told Bloomberg. “I see a difficult path for margins from now to the end of the year.”

How difficult? Well, the minutes of the latest Federal Reserve meeting will be released this week and may provide additional sober thoughts on the outlook.

In addition, there will be reports on consumer and producer prices, retail sales, industrial output and consumer sentiment.

(BusinessDesk)

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