NEW YORK (
) -- Next week's bank earnings stand to further support the optimists and give credence to economic doomsayers all at the same time. How the market will respond is anyone's guess, and the range of earnings estimates
continues to reflect a wide disparity in opinion.
After large-cap bailout recipients threw investors for a loop with first-quarter results, the market appeared to have earnings fatigue for the second quarter. For instance,
shares soared following its prereport of a surprise $3 billion first-quarter profit. But its stock slumped after it reported its second quarter -- despite another big Street beat -- due to credit concerns.
will be the first big bank on the earnings docket Wednesday morning, followed by
on Thursday and
Bank of America
on Friday. Wells reports on Tuesday, Oct. 20.
Estimates reflect analysts' unsurprising belief that Goldman and JPMorgan will be profitable, Citi will lose money, and Bank of America could go either way. Though Goldman has the most analyst coverage -- 23 provided estimates for a Thomson Reuters poll -- its profit range is narrowest, while the market is least certain about Citi and BofA's bottom-line strength.
"While credit measures will continue to deteriorate, investors will look to signs that suggest reserve build is nearing an end -- which we believe is unlikely," says Collins Stewart analyst Todd Hagerman in a report this week about third-quarter results. "Conversely, an outsized negative surprise tied to commercial real estate, combined with negative regulatory undertones, could easily trump the positive signs expected in consumer real estate this quarter."
In other words, there are a range of concerns, and the market may respond schizophrenically depending on how they have been prioritized.
Outside of the financial sector, though, investors have set their sights squarely on revenue. Though corporate powerhouses were able to sustain relatively robust results through big cost-cutting measures, top-line growth will be a signal of true recovery. Investors will be watching reports from tech titan
Dow Jones Industrial Average
Johnson & Johnson
on Tuesday as well as
on Thursday, for signs that growth is either underway or about to occur.
"You can't keep growing by cutting costs," says Len Blum, managing director of the investment bank Westwood Capital, later adding, "For a sustainable growth strategy, you really need to have consumers spending money."
The Commerce Department's retail sales report on Wednesday will give signs about the health of the consumer, which remains dreary at best. Unemployment climbed to 9.8% in September, the highest level since 1963. When factoring in millions of discouraged Americans without jobs who would like to work but have stopped bothering to look, the rate climbs to 17%. Confidence remains low, even among the gainfully employed, because they fear their jobs may be next on the chopping block.
Minutes from the
recent meeting will outline policymakers' view of the economic situation. The minutes are set to be released on Wednesday, and investors tend to scan them for telltale signs about the central's interest-rate policy. The Fed has kept such loose control on the money supply that banks have mostly been
borrowing money for free, while receiving interest on their reserves. Lower rates have boosted banks' bottom lines, while also bringing some relief to overextended homeowners who refinanced into cheaper loans.
Though few expect that policy to change before year-end, Daniel Penrod, senior analyst at the California Credit Union League, says investors will be looking carefully at the Fed statement for clues about the real-world economic recovery -- one that the market has been both detached from and reliant upon for growth. He notes that traders often rely on models based on past downturns that will not necessarily mirror today's economic situation.
"There's a big disconnect between Wall Street and Main Street right now," says Penrod, who is betting on a gradual, "U" shaped recovery. "Wall Street has climbed remarkably, but Main Street is still sitting on its hands."
Still, given the market's recent pause, investors already may be factoring in the bad news. PNC Chief Investment Strategist Bill Stone notes that, excluding financials, investors expect profits for
firms to have declined nearly 30% last quarter. Including financials -- which have suffered or benefited unpredictably from wacky accounting shifts, government subsidies and climbing credit issues -- the market expects a 3.2% earnings decline from a year ago.
However, Stone points out that the year-to-year comparison is "very tough," since the third quarter of 2008 represented a peak in nonfinancial S&P 500 profits, as banks were posting mammoth writedowns. Overall, he expects "another positive earnings surprise relative to expectations," and says investors should look for revenue growth, continued cost cutting and management commentary about the quarters ahead.
"The economic outlook is now improving and should provide a constructive backdrop for the markets," Stone says. "Our view is that the Great Recession of 2008-09 is over."
-- Written by Lauren Tara LaCapra in New York