Updated from 6:44 p.m. ET to include additional information about Tuesday's economic data.
NEW YORK (
) -- One odd little factoid about the broad market's rally off the October lows is that earnings expectations for the first quarter were falling steadily throughout.
Now that reporting season is finally here, the opposite scenario is playing out. The results so far are comparatively good with roughly 80% of the companies opening their books coming in ahead of consensus, yet stocks have finally begun to pull back.
Since the start of the calendar second quarter, the
Dow Jones Industrial Average
has lost 2.2%, the
has given back 2.9%, and the
has surrendered 3.9% through Monday's
to the week.
The market's direction usually gets explained away on a day-to-day basis by pointing to a hodgepodge of factors; many times boiling down to bad headlines -- Europe's political instability, China's economy showing signs of cooling off,
Mexico fiasco -- putting the so-called
trade into effect, or else the opposite, good headlines being cited as giving traders the confidence to ramp up risk.
BMO Capital Markets addressed this schizophrenic view of the markets on Monday as the firm established a year-end price target of 1425 for the S&P 500.
It appears investors are basing investment decisions more on emotion rather than analysis lately," wrote chief investment strategist Brian Belski, who joined BMO from Oppenheimer earlier this month. "For instance, recent market trends have become increasingly bifurcated, alternating between 'risk-on' and 'risk-off' sentiment, which in turn has been fueled by investor fears of either 1) missing out on periods of market strength or 2) preserving capital during periods of market weakness."
Belski is bullish but believes trying to play along with this "risk-on, risk-off" psychology is a losing game. His optimism stems from a belief that the United States is set up to act as a safe haven of sorts over the next few years as Europe struggles and China works through its growing pains.
We firmly believe US fundamentals are positioned to provide global leadership for the next several years and as a result, those investors who maintain a disciplined and process-oriented approach to fundamental analysis during periods of potential volatility will most likely be the ones who benefit the most," he wrote, advocating "active" stock picking strategies over aping indexes.
The falling expectations for first-quarter earnings got ignored in the first three months of 2012 in part because the U.S. economy was showing real signs of improvement, especially in the employment picture. There was also a belief that the
, which starts a two-day policy meeting on Tuesday, would come across with QE3 sometime in the second quarter.
Add in the European Central Bank's moves to calm sovereign debt contagion fears with another bailout for Greece and its massive long-term refinancing operation, which many consider a kind of backdoor quantitative easing, and there's your rally.
Now that the actual so-so earnings are here, even if they are a little better than expected, the market is resetting a bit. Guidance hasn't been great, and ponying up for stocks -- even some of the fundamentally sound ones -- after 25%-plus gains over the past six months suddenly seems, well, risky.
As for Tuesday's scheduled news, it's all about
, and it's worth asking where the doubters were a few weeks ago when the stock was getting cheered to new highs day after day?
After closing on April 9 at $636.23, Apple shares went on to hit an intraday all-time $644 on April 10, and it's been mostly downhill from there. The stock has fallen in nine of the past 10 sessions, including Monday's finish at $571.70. It's down 10% in that span, not exactly reminiscent of confidence ahead of its fiscal second-quarter report, which is due after the closing bell.
Wall Street isn't worried about a miss though. It's more a case of getting ahead of guidance in case there's a not-so-incredible quarter coming later in the year because of the timing of various product launches.
"Despite a likely very strong March Q, we do think Apple's stock will consolidate in the June Q, given q/q declines in iPhone sales in the June Q and some risks to iPhone sales in the September Q, depending on the timing of the new iPhone launch," said BMO analyst Keith Bachman on Monday. He has an outperform rating on Apple with a $750 price target.
The issue of carriers deciding to slash subsidies for future iPhone models is also addressed by Bachman, who estimates if subsidy levels were cut by $100 per phone, his estimate for fiscal 2013 earnings -- currently $50.35 per share -- would come down by $7.50.
Historically, the day after earnings is usually a disappointing one for Apple's stock. According to
, the shares trade lower 68% of the time in the next day's session, losing an average of 0.5%.
The current average estimate of analysts polled by
is for Apple to report earnings of $10.02 a share in its fiscal second quarter on revenue of $36.7 billion. The company has topped the consensus view on a quarterly basis 97% of the time since 2003, Birinyi said, with its fiscal fourth-quarter report last October standing out as the only miss.
Check out TheStreet's quote page for Apple for year-to-date share performance, analyst ratings, earnings estimates and much more.
Tuesday also brings quarterly reports from two more Dow components,
3M, the maker of Post-Its and Scotch tape, is expected to earn $1.49 a share on revenue of $7.49 billion in its first quarter ended in March. The stock is up a little more than 6% so far in 2012, and the sell side is slightly bearish ahead of the report with 12 of the 20 analysts covering 3M at hold (9) or underperform (3). The median 12-month price target sits at $93.50 vs. Monday's close at $87.13.
AT&T, meanwhile, is the rare tech company that's lagged the broad market in 2012, rising just 2% this year. Wall Street is looking for earnings of 57 cents a share on revenue of $31.85 billion from the company, which is sure to get quizzed on its iPhone subsidy plans on the conference call.
The shares currently trade at a forward price-to-earnings multiple of 12.1X, cheaper than rival
at 13.9X, and the forward annual yield on AT&T's stock sits at 5.7% vs. 5.2% for Verizon. The direction of margins on the wireless business will be a major focus as the company has had issues with unlimited data usage plans hogging its network capacity.
Other companies reporting Tuesday morning include
Air Products & Chemicals
Heidrick & Struggles
Illinois Tool Works
T. Rowe Price
The late roster features
Buffalo Wild Wings
International Game Technology
Aside from the start of the FOMC meeting, Tuesday's economic calendar features the S&P Case-Shiller 20-city price index for February at 9 a.m. ET; The Conference Board's consumer confidence index for April at 10 a.m. ET; new home sales for March at 10 a.m. ET; and the Federal Housing Finance Agency housing price index for February at 10 a.m. ET.
The consensus view is for new home sales to come in at 318,000, but Ian Shepherdson, chief U.S. economist at
High Frequency Economics
, has set his sights higher with an estimate of 330,000. He expects the data will finally start to reflect the recent improvement in the National Association of Home Builders' monthly survey.
On home prices, Shepherdson thinks more patience is going to be necessary. He's in line with consensus, calling for a 0.1% increase in the Case-Shiller index. Progress is being made, he says, but it will take a while for a spike in sales volume to bring prices higher as well.
"We surmise that in the medium term, increases in activity and prices will persuade millions of frustrated would-be sellers -- and owners of foreclosed property -- that the market has improved so it will be worth listing their homes for sale," he wrote in commentary on Monday. "That will shift the whole supply curve to the right, boosting the number of transactions further but dampening the increase in prices. This idea underpins our core view that sales will likely rise 20-30% over the next couple of years but prices will rise modestly, if at all."
The consensus view, according to
, is for consumer confidence to dip down to 69.5 from 70.2 in March as elevated gasoline prices and the pullback in the stock market dampen enthusiasm.
took a big hit in late trades after the company gave a
for the second quarter. The stock was last quoted at $85.38, down 16.2%, on after-hours volume of more than 5.5 million.
Written by Michael Baron in New York.
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