Wall Street faces a gut check in the coming week as an avalanche of earnings reports will show how well corporate America is holding up in the face of economic turmoil.
So far the news from the earnings front has been grim, with a sharply disappointing report from General Electric, which is often seen as a microcosm of the economy, and lackluster results from aluminum maker Alcoa.
The big question for investors is whether the market has priced the impact of housing and financial market turmoil into stock prices and earnings, or whether more surprises are in the offing, analysts said.
In the week to Friday, the Dow Jones Industrial Average lost 2.25 percent to 12,325.42 while the Standard & Poor’s 500 broad-market index shed 2.74 percent to 1,332.83.
The tech-dominated NASDAQ composite slid 3.4 percent to 2,290.24.
The past week’s market action was marked by a disappointing report on the US trade balance, a sharply weaker consumer sentiment survey as well as the earnings news.
Additionally, the US Federal Reserve released minutes effectively acknowledging a contraction in the US economy that would mean as recession is at hand.
Barry Ritholtz at Ritholtz Research & Analytics said the surprisingly weak profits and lower outlook from GE shows the stock market has been too complacent.
“Markets are not cheap, and are not priced for a full blown earnings recession,” he said. “The stock market may be entering a mine field as earnings start to flood the tape next week. We shall soon see if investors are getting real about earnings. GE proves that the economic slowdown is directly impacting corporate America.”
Markets are girding for a new wave of earnings reports from a variety of industries including tech giants Intel and Google, banking titans Citigroup, JP Morgan Chase and Merrill Lynch, health care firms Pfizer and Johnson & Johnson, and soft drink maker Coca-Cola.
Miles Zyblock, an analyst at RBC Capital Markets, said the outlook for corporate profits “is too optimistic for our comfort” with a consensus forecast of 14.4 percent earnings growth for the S&P 500 this year.
Bonds rose as investors looked for safety.
The yield on the 10-year Treasury bond dipped to 3.471 percent from 3.481 percent a week earlier, and that on the 30-year bond fell to 4.302 percent against 4.381 percent.
Bond yields and prices move in opposite directions.
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