An optimistic earnings season may run into the buzz saw of a self-fulfilling “sell the inauguration” prophecy if quarterly results are not near flawless in the coming week.
Stocks ended a lackluster week with the Dow Jones Industrial Average
finishing down 0.4% and the S&P 500 index
slipping 0.1%. Only the Nasdaq Composite Index
posted a weekly gain of 1% as it sailed into another closing record on Friday.
After the Martin Luther King Day holiday on Monday, financial stocks continue to figure heavily with earnings. Expectations are high following upbeat results from J.P. Morgan Chase & Co. on Friday that were driven by a jump in trading revenue. High-profile reports are expected from Goldman Sachs Group Inc.
and American Express Co.
Transports also figure heavily in earnings reports this week with Union Pacific Corp.
United Continental Group Inc.
and Kansas City Southern Corp.
all components of the Dow Jones Transportation Average
which has soundly outperformed the Dow industrials over the past year.
Earnings for the S&P 500 are expected to grow 3.2%, but actual earnings growth could clock in at more like 6.1% if the average analyst consensus underestimate holds true, according to John Butters, senior earnings analyst at FactSet.
With stock prices that have been pushing against records and high expectations for earnings growth after a long drought, the start of earnings season is running into the possibility that the market may have gotten ahead of itself on enthusiasm after Donald Trump’s presidential election in early November.
Stocks have already priced in much of the upside to Trump’s pro-growth policies without having taken into account negatives like a possible trade war or actual implementation of the pro-growth policies, said Randy Frederick, managing director of Trading & Derivatives at Schwab Center for Financial Research, in an interview
“Given most indicators, it doesn’t look too good as we approach what looks to be buy the rumor, sell the inauguration,” Frederick said. “There’s too much optimism.”
While Frederick doesn’t see a large correction in the near-term future, he does see an up to 5% pullback in the works given what appears to be a short-term top in the market.
Case in point, since Dec. 13, when the Dow first came within 50 points of 20,000 (or the past 22 trading sessions), the average has come within 50 points of touching the psychological milestone without breaching the level 12 times.
Not everyone is buying the “buy the election, sell the inauguration” line of thinking, however. BMO’s Brian Belski called that approach “nonsense,” acknowledging that while stock prices may have gotten a little ahead of themselves, we’re still in the midst of a secular bull market and that pullbacks should be used to add “selected exposure.”
Notable earnings reports on deck
|Report date||Company/ticker (FactSet EPS / revenue estimates)|
|Mon., Jan. 16||Markets closed for Martin Luther King Day|
|Tues., Jan. 17|
|Weds., Jan. 18||
|Thurs., Jan. 19|
|Fri., Jan. 20||