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Investors look to earnings for hints about consumer spending
2008-04-26
Wall Street has so far had a mostly subdued reaction to corporate earnings released in the past few weeks, but that could be about to change. Just about halfway through the first-quarter reporting season, most of the blue chips that make up the Standard & Poor's 500 index have not pulled any surprises. In fact, stripping out the gloom coming from financial companies like Merrill Lynch & Co. or Citigroup Inc., profits are up 11 percent year-over-year. With this generally good performance, the market hasn't had the kind of turbulence that some feared before the start of earnings season, and the S&P 500 index has risen about 4 percent in the past two weeks. But the coming week might change the market's dynamics, as a string of consumer-oriented companies including electronics stores and food companies are scheduled to release their results. Wall Street is worried about slowing consumer spending, and these companies might give investors their best indication yet about how much Americans are willing to spend these days. "We've pieced together a decent earnings season so far, and everybody handicapped the financials out of the market," said Chris Johnson, president of Johnson Research Group. "Now the companies that represent the activities of the consumer are going to fall in the crosshairs, and that can tell us more about where this economy is heading." Still, Wall Street has some newfound strength going for it -- even when investors have encountered disappointing results in recent weeks, the market has been able to right itself. When General Electric Co. reported an unexpected 6 percent drop in profit, the news unnerved investors worried that the financial crisis that gutted investment banks had begun to spread. GE is considered a good indicator of the economy because it has businesses across a number of big sectors. The Dow Jones industrials tumbled in response to the report on April 11, but in the following two weeks, investors have stepped back and have been able to examine earnings results as a whole. Though financial companies have so far left the S&P 500's profit growth at a negative 13 percent, there are still more companies beating Wall Street projections then not. "We really have two sides to this earnings season between the financials and everyone else," said Howard Silverblatt, Standard & Poor's senior index analyst. "And, if we continue this positive news across the board people are going to feel a lot better that we'll have a much better second half. But, we have to get through those consumer discretionary companies." Indeed, these companies are closely watched because they give Wall Street a glimpse consumer spending, which contributes to two-thirds of the U.S. economy. Any sharp pullback could have disastrous effects. Right now, the companies in this sector that have already reported results show a 6.8 percent decline in profits. This is shaping up to be their fifth-straight quarter of down earnings. Some of the big names due to report this coming week include Tyson Foods Inc. on Monday; Office Depot Inc. and Avon Products Inc. on Tuesday; Kellogg Co. and Kraft Foods Inc. on Wednesday; and Burger King Corp. and CVS Caremark Corp. on Thursday. Silverblatt and other analysts said the key will be about what these companies predict for the third and fourth quarters, which is when most economists feel the economy may begin to swing higher. "These are the companies that help you on the way up, and the hope is that the markets will move higher once people begin spending money in the second half," Silverblatt said. "There's even stores out there that are willing to take your stimulus package checks and give you a 10 percent discount if you spend it at their stores. Consumer spending is that important." The Treasury Department is expected to begin making the first electronic deposits to taxpayers for the stimulus package on Monday -- five days sooner then expected. The thought on Wall Street is that these checks will boost profit at retailers during the second quarter.
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