Updated from 7:07 a.m. ESTAs earnings reporting season picks up steam this week, the stock market is starting to see more upside surprises. Both before and after the bell Tuesday, the tone shifted from last week's, when a smattering of disappointments held the markets in check until Friday. Ahead of earnings after the close from (most notably) Motorola ( MOT), IBM ( IBM) and Yahoo! ( YHOO), the major indices moved higher Tuesday, notching the first back-to-back gains of 2005. The Dow rose 0.7% to 10,628.79, the S&P 500 gained 1% to 1195.98 and the Nasdaq Composite rose 0.9% to 2106.04. And the earnings after the close from three tech bellwethers ought to add to the renewed sense of confidence: Motorola said its new Razr phone was selling like crazy; IBM said profit from continuing operations rose 12% to $3.1 billion, or $1.81 a share -- 5 cents ahead of analysts' estimates; and Yahoo! said net income, excluding a big investment gain, more than doubled to $187 million, or 13 cents a share, slightly ahead of estimates. "Ought" is a loaded word on Wall Street, however, and index futures -- while strengthening from earlier levels -- were pointing to a mild easing in Wednesday's premarket. Other firms surprising on the upside included Seagate ( STX), Bank of America ( BAC), Ryland ( RYL) and Charles Schwab ( SCH). Still, it wasn't all happiness as Motorola's forecast was at the low end of a previous signal, and IBM posted the slowest sales growth in two years.
Thomson Financial says the quarter's preannouncements have been about average. For all stocks included in the First Call database, companies issuing warnings outnumbered companies revealing positive news by 2 to 1 vs. the long-term average of 2.2 to 1. But for the past week, 28 companies were negative and 25 positive. One exception may be in basic industrial materials stocks, which passed a peak in analyst upward earnings revisions back in October, according to Lehman strategists Ian Scott and Inigo Fraser-Jenkins. Three previous peaks -- in 1988, 1994 and 1999 -- signaled trouble ahead for the sector. Stocks in the sector lost an average of 15% in the 12 months after those three prior peaks. "Although we have been somewhat surprised by the resilience of this part of the market in the face of factors that would normally have signaled a correction -- especially the flattening yield curve -- the next and final shoe is about to drop for the sector," the Lehman analysts write. "The very strong earnings momentum enjoyed by the sector is now starting to wane." The report doesn't mention specific stocks except to say that MeadWestvaco ( MWV) remains in the firm's global recommended portfolio but Sealed Air ( SEE) has been removed. Among the most prominent stocks in the space are Dow Chemical ( DOW), DuPont ( DD) and Alcoa ( AA). However, the previous periods of weakness for the sector did not foreshadow poor performance by the market as a whole. In fact, the markets gained an average of 18% over the 12 months following a peak in analyst upgrades for basic industry stocks.
"If signs of price pressures emerge on a consistent basis, we will need to consider quickening the pace at which we move toward policy neutrality," Santomero said, while adding that at least so far there were no signs mandating such a change in policy. Bonds slipped early but managed to post slight gains as other speakers sounded less worrisome. Fixed-income players also were reassured by a Treasury Department report showing that foreign investors, including foreign central banks, markedly increased their purchases of U.S. securities in November. The yield on the 10-year Treasury note declined slightly to 4.20% from 4.22% on Friday. On Wednesday, the Labor Department reports how the consumer price index performed last month. November's annual rate of 3.5% was the highest in more than three years. Bonds also were helped by a slowdown in the New York Fed's manufacturing report. Barry Webb, senior market analyst at Legg Mason, makes an insightful point about how that statistic was misreported. Tuesday's New York survey for January was reported as 20.1, lower than the 27.1 reported in December. Many news reports said the index showed that manufacturing activity had slowed from the previous month. Not so fast -- the index is a diffusion index and the headline number is simply the percentage of respondents who say conditions are improving from the previous month minus those who say conditions are getting worse. In other words, any reading above zero shows that manufacturing activity expanded in January from December. The pace of improvement slowed, but that's it. "Before activity could be legitimately reported to have actually fallen based on this measure the index level would have had to show a negative value," Webb wrote.