Coming Week: 'Glimmer of Hope'

Investors' reaction to lackluster financial performances may mean the market has finally hit a bottom.
By Nat Worden ,

It hasn't been pretty, but underneath the headlines early in the first-quarter earnings season, there are some reasons for investors to be hopeful.

More companies than usual are missing expectations on Wall Street, but the carnage is nothing like that of the fourth quarter of 2007 when analysts over-estimated profits for the

S&P 500

by 33.5 percentage points -- their biggest miss ever.

Furthermore, stocks are holding their ground and even rising in some instances in the face of ugly performances, suggesting that investors have made great strides in coming to terms with their predicament.

"There may be a glimmer of hope in these otherwise dreary numbers," says Thomson Financial analyst John Butters. "It seems like maybe the analysts are starting to get the numbers down to where they should be."

On Friday, Thomson Financial reported that one week into the heart of the first-quarter reporting season, expectations for profits from the S&P overall had drifted down by one-half a percentage point to 14.6%.

Out of 99 companies that had reported results so far, 63% had beat estimates, falling below the average 66%. Meanwhile, 24% of the companies on the books have missed expectations -- above the average 21%. Some major misses have been especially worrisome, like

General Electric

(GE) - Get Report

and

Pfizer

(PFE) - Get Report

.

Despite the disappointments, stocks gained last week. The

Dow Jones Industrial Average

and the S&P both rose by 4.3% for the week, while the

Nasdaq Composite

was up 4.9%.

When

Merrill Lynch

( MER) reported a loss for the quarter of about $2 billion, with $6.6 billion in write-downs on bad debt, its stock rallied in the following session by about 4% even though the results fell below expectations on Wall Street.

Citigroup

(C) - Get Report

followed up on Friday with a loss of $5.1 billion on $12 billion in writedowns and a $3.1 billion increase in credit costs in its global consumer business. Nevertheless, its stock rose 4.5% during the session.

Wall Streeters have been calling a bottom in financials for months now, and the current efforts to rally investors may prove as fruitless as its predecessors. That said, the trading action surrounding first-quarter results seem to display a renewed confidence that has been lacking since the credit crisis began last summer.

Like previous quarters, financials remains on track to be the worst performing sector in the first quarter. It's expected to show a 67% decline in year-over-year earnings for the period when all is said and done.

But in a glimpse of how expectations have shifted, 53% of the financial institutions that have reported first-quarter earnings so far have beat Wall Street's expectations, while 31% have missed. For the fourth quarter, those numbers were basically reversed, with 34% beating expectations and 59% missing.

Factoring out the financials, the S&P is headed for a 6.7% increase in first-quarter earnings. On the flip side, the overall numbers are getting a big boost from the energy sector, which remains awash in profits amid soaring fuel prices -- hardly a boon to the broader economy as consumers struggle with record-high prices at the gas pump.

Factoring out the 28% profit growth expected for the energy sector, along with the massive losses for financials, the S&P is headed for a measly 1.9% gain.

To be sure, these numbers could gyrate wildly as the reporting season brings more surprises. Last week,

Google

(GOOG) - Get Report

blew away Wall Street's estimates and quashed fears of a slowdown in online ad spending as the U.S. recession takes root. In the industrial sector,

Caterpillar

(CAT) - Get Report

also surprised big to the upside. Shares of Google ended the week up 18%, while Cat shares added 14%.

Both companies are benefiting from a trend long in the making that is becoming pervasive in the latest earnings results on Wall Street: Overseas economies are booming, while the U.S. is slowing.

Executives at Google, the online search giant that makes 51% of its revenues from overseas markets, told investors that they have seen no evidence that a slowdown in U.S. consumer spending is weighing on their overall business. Even in the U.S., consumers are turning to the Internet for gas-free shopping and entertainment, as they overhaul their budgets.

For his part, Cat CEO Jim Owens said "we're at an unprecedented time in history with North America being so weak and the rest of the world so strong."

Investors would do well to look for companies with heavy international exposure next week, when Wall Street will receive an even larger barrage of first-quarter earnings results. Tech companies like

Yahoo!

(YHOO)

,

Microsoft

(MSFT) - Get Report

,

Apple

(AAPL) - Get Report

and

Texas Instruments

(TXN) - Get Report

are on tap, along with a slew of consumer products giants, industrial conglomerates, newspaper publishers, airlines and regional banking institutions.

Economic news will be light next week, with few investors even bothering to look at the continued declines in existing home sales, which will be reported on Wednesday, and new home sales on the following day.

Also Thursday, economists are expecting the federal government to report a 0.1% gain in orders for durable goods in March, which would mark a sharp reversal from the 1.7% decline in February.

Friday will bring a fresh revision to the University of Michigan's consumer sentiment index for April, which previously showed a reading of 63.2, its lowest in over a quarter century.

Therein lies the threat to the current pause in the market selloff of 2008. The housing downturn is wreaking havoc on the broader U.S. economy, and this process promises to bring more financial turbulence over time as consumers cut back on spending and credit problems spread beyond mortgage loans.

If U.S. economic conditions worsen, it remains to be seen whether emerging economies around the globe that are boosting profits at multinational corporations will hold up, since they're increasingly tied to the U.S. in this age of globalization. Such concerns led Cat to refrain from boosting its profit outlook for all of 2008, despite the fact that it beat estimates by 12 cents a share in the first quarter. Owens, Cat's CEO, said the U.S. is in the midst of a "recessionary storm" and he expects economies in Western Europe and Japan to slow this year.

"We had a great first quarter, no doubt about it, but it's still early in the year and we're still waiting to see how things play out," he said.

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