Market bulls will face a big test in the coming week, as the second-quarter preannouncement season gets under way. After the recent big rally in stocks, market watchers are questioning whether the momentum will be able to continue if there's a flurry of earnings warnings. From March 11 through the week of June 6, the Dow Jones Industrial Average has gained 20%, the Nasdaq Composite has jumped 28%, while the S&P 500 has risen 23%. The Dow has been up for 11 of the last 12 trading days, with all three major market indices posting solid gains in the first week of June. About 700 companies have already preannounced for the second quarter, and early signs have been promising, according to Ozan Akcin, chief market strategist at Puglisi & Co. In the first quarter, he said, there were about three earnings warnings for every positive preannouncement, but early signals about the second quarter show that preannouncements are below historical trends. "You'll probably have some large names guiding down, managing expectations, which could create negative sentiment. We might have a slight pullback and be sideways until second-quarter earnings season, but then I think we'll have good news," Akcin said. "We're running at about 2.1 profit warnings for every upward guidance. While that means there's twice as much bad news as good news, this is always skewed to the negative side." From an economic perspective, this week will also be a critical test to see how markets react in the wake of some positive economic signals. The coming week features a look at wholesale inventories on Monday, the Fed's Beige Book on Wednesday, followed by retail sales and business inventories on Thursday. The end of the week brings the purchasing price index and preliminary consumer sentiment numbers from the University of Michigan.
Of all those data points, retail sales and business inventories are seen as one of the most important. If sales slump and inventories rise, then corporations will cut capital expenditures and work on inventory levels, as they've done for the last three years. "We have certainly been more focused on corporate sentiment," said Akcin. "With consumer sentiment, the obvious implication is a collapse in spending when sentiment falls, but that's not a 100% tight relationship. In the Gulf war, spending kept up pretty much even though sentiment fell. But what are corporations saying? They're the ones pulling us out of this rut. If they don't have confidence, we're in a tight spot."