Stock-market bulls are counting on earnings season to right a ship that has been buffeted by technology-industry woes and escalating tariff tensions between the U.S. and China that threaten to erupt into a full-blown global trade conflagration.
The week ahead might be crucial. First-quarter earnings season gets under way in earnest on Thursday and Friday, with results from large banks including BlackRock Inc. BLK, -3.43% Wells Fargo & Co. WFC, -1.93% and JPMorgan Chase & Co. JPM, -2.49%
“Returning to a focus on fundamentals will be a welcome development to many investors,” said Lindsey Bell, investment strategist at CFRA, in a note.
Overall, analysts and companies are looking for a strong earnings season, partly in response to the corporate tax cut signed into law in December.
But stocks saw a volatile, up-and-down week end on a sour note Friday, with the Dow Jones Industrial Average DJIA, -2.34% finishing the day down 572 points, or 2.3% points, while the S&P SPX, -2.19% dropped 2.2% and the tech-heavy Nasdaq Composite COMP, -2.28% shed 2.3%. That left all three major indexes with weekly losses of greater than 2%.
See: Here are Friday’s worst stocks as trade conflict and a weak jobs report disappoint investors
The end-of-week slide—and much of the turmoil at the start of April—revolved around trade-war fears. The latest flare-up followed the White House’s announcement after Thursday’s market close that President Donald Trump had ordered the U.S. trade representative to consider proposing tariffs on an additional $100 billion of Chinese goods on top of the $50 billion outlined earlier in the week. The previous move had prompted a retaliatory set of proposed tariffs by China, while the latter announcement prompted the threat of further action even as both sides prepare to negotiate.
Still, many analysts remain upbeat on the outlook for stocks and the economy, arguing that the saber rattling on trade, while unnerving, is still likely to be resolved without inflicting significant damage on the U.S. or global economy.
Allan von Mehren, chief analyst at Danske Bank in Copenhagen, sees Trump putting maximum pressure on China, with the tariffs accompanying the signing of the Taiwan Travel Act, which opens the door to high-level visits between the U.S. and the island that Beijing claims as part of its territory.
“Trump’s aim may very well be to put maximum pressure going into a negotiation to get as many concessions from China as possible. We have seen this many times before in his tactics on making deals,” von Mehren said.
That could lead to behind-the-scenes deal making that results in a grand bargain, with the U.S.> backing down from the Taiwan issue and reducing the proposed tariffs in exchange for better access for U.S. companies in China and a stronger effort by China to protect intellectual property rights and to stop requiring the transfer of technology in joint ventures.
While von Mehren sees that scenario as the most likely, the danger, he acknowledged, is that Trump and China proceed to hit each other with an escalating series of tariffs and countermeasures.
Market bulls are confident that barring a worst-case scenario, the economic expansion has a long way to run.
“As long as the economy continues to grow at a moderate pace, earnings should continue to rise, and stocks typically avoid a bear market until earnings expectations turn down,” said Steven Ricchiuto, U.S. chief economist at Mizuho Securities, in a note.
“We also know that the global economy is fairly healthy and that excess supply remains the dominant disinflationary force, which should keep the Fed from overtightening and causing the economy to stall. The net of what we know and what we don’t know leaves us looking for three more rate hikes in 2018, 10-year Treasury notes establishing a new 2.75%-to-3% trading range, and a 10% rise in U.S. equities in 2018,” he said.
Meanwhile, expectations are running high on the earnings front. For the first quarter, 52 S&P 500 companies have issued negative earnings guidance, while 53 have issued positive guidance, according to John Butters, senior earnings analyst at FactSet.
That leaves the number of companies issuing negative guidance well below the five-year average of 80 and the number issuing positive guidance well above the five-year average of 28.
On the economic front, data on tap in the coming week include the March producer-price index on Tuesday followed by the consumer-price index on Wednesday. The minutes of the Fed’s last meeting, at which it delivered a quarter-point interest rate rise, is also due on Wednesday.
