Sunday, July 11, 2010

It's all about earnings this coming week

One week can certainly change a lot of things. Last week, investors were worried about a double-dip recession. This week, on the other hand, has been a great one for stocks, as the Dow has gone up for 4 days in a row to close at 10198.03 on Friday. In fact, major indices have risen about 5% this week. This has been caused by some encouraging economic and consumer data. For example, the IMF raised its world economic growth forecast for this year from 4.2% to 4.6%.

Despite the positive developments this week, fund tracker EPFR Global stated that US$11 billion left equity funds, while US$33.5 billion entered into the safer money market funds. In addition, Bespoke Investment Group noted that sentiment is at its lowest since May 2009. Meanwhile, the American Association of Individual Investors stated that bullish investor sentiment fell to just 21 percent last week, which is the lowest since early March 2009.

The markets are now turning to earnings for direction, as Alcoa Inc kicks off the earnings season after markets close on Monday. Other companies that will report earnings this week include Google Inc, Intel Corp, JPMorgan Chase & Co and Bank of America Corp.

Ever since the end of the recession, US companies have posted great earnings, which has partly driven the spectacular rally from the March 2009 lows. The good earnings have partially been caused by extensive cost-cutting. At this stage in the recovery, investors are increasing not only looking at the bottom-line (profits), but also the top-line (revenues). 

However, with investor sentiment being currently so bearish, earnings that are mildly positive are all that are needed to keep markets rallying. Thus, with bearish sentiment providing the perfect backdrop, I expect markets to continue rallying this week on the back of mildly positive earnings.

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