Whether a two-week selloff has been justified should become a little clearer in the coming days, as a slew of companies release fourth-quarter earnings. Some 76 S&P 500 companies are scheduled to release quarterly profit reports in the week ahead, including Yahoo! ( YHOO), eBay ( EBAY) and IBM ( IBM). Over the past week, analysts' estimates have been coming down despite good news from Apple Computer ( AAPL) and Intel ( INTC). According to Thomson First Call, earnings now are expected to rise 15.1% in the fourth quarter. At the start of November, analysts were looking for year-over-year growth of 15.7%. John Waterman, managing director of investments at Rittenhouse Financial, said investors have grown accustomed to companies beating the consensus forecasts by a wide margin. "Earnings have been very good, so the bar is set high" for the fourth quarter, he said. Unfortunately, more firms are likely to miss estimates this time around, he said, and there won't be as many positive surprises. Waterman expects investors to rotate into large-cap names over the next few weeks, continuing a recent trend. Since the start of the year, the Russell 2000 index of small-cap stocks has shed more than 5%, but the Russell 1000 index has fallen just 2.4%. In 2004, large-caps rose 9.4% on average while small-caps surged about 17%. "Earnings are slowing, economic growth clearly is decelerating, and people will probably be less willing to buy riskier stocks," said Waterman. Joe Liro, equity strategist at Stone & McCarthy Research, said concerns about the earnings season, rising oil prices and tension ahead of the Iraq elections on Jan. 30 all have hampered the market of late. Nymex crude oil recently moved back above $48 a barrel. Last week, the Dow Jones Industrial Average fell 0.4% while the Nasdaq Composite and S&P were down fractionally following sizable losses the week before. Some analysts said the performance is unsurprising, given strong gains for the major averages late last year. In the fourth quarter, the Dow, S&P and Nasdaq rose 7%, 9% and 15% respectively.
"If we get past the elections, earnings are OK and oil comes back down, then you have the makings for a fairly positive environment," Liro said. "But a lot of things have to fall into place." Among the Dow components due to report next week are 3M ( MMM) and IBM on Tuesday, General Motors ( GM), J.P. Morgan ( JPM) and Pfizer ( PFE) on Wednesday, Citigroup ( C) on Thursday and United Technologies ( UTX) and General Electric ( GE) on Friday. Internet giants Yahoo! and eBay will report on Tuesday and Wednesday, respectively. Analysts expect Yahoo! to earn 11 cents a share compared with just 5 cents last year. eBay is projected to earn 34 cents a share, up from 22 cents last year. While earnings will take the spotlight, a handful of economic reports also will be closely watched for any clues about the future path of interest rates. Last week, St. Louis Fed President William Poole suggested that the Fed could drop its plan to raise rates at a "measured" pace at some point in the future. So far, the bank has been raising rates in quarter-point increments. Atlanta Fed President Jack Guynn recently stressed that labor costs, energy and import prices all are rising, and hinted that the amount of slack in the economy might be overstated. Meanwhile, Boston Fed President Cathy Minehan said "economic growth could well tighten pressure on resources faster than I expect." "These comments reveal that the Fed is comfortable with keeping rate hikes slow and steady for now, but it would not take much to tip the scales in favor of 50-basis-point moves," said Sherry Cooper, chief economist at BMO Nesbitt Burns. Perhaps the most significant report on tap next week will be the consumer price index on Wednesday. Economists expect the index to climb 0.1%, with the core rate up 0.2%. Housing starts and the Fed's beige book also are due out Wednesday, and the Conference Board's index of leading economic indicators is scheduled for Thursday. The Philadelphia Fed survey and the Michigan consumer sentiment survey for early January will be released Friday. The markets will be closed Monday in observance of the Martin Luther King Jr. holiday.