| NEW YORK
NEW YORK Oct 14 A heavy slate of U.S. corporate
earnings could set the course next week for a wavering U.S.
Better-than-expected big bank earnings on Friday somewhat
helped shore up Wall Street's confidence, which has been shaken
by a rocky beginning to third-quarter reporting season, marred
by disappointing results from industrial and healthcare
But with the bulk of results still to come, investors are
counting on large U.S. companies to stop a year-long streak of
profit declines. Next week's reports include Microsoft,
General Electric, Johnson & Johnson and Bank of
Mixed initial results have added to other concerns in recent
days that hurt equities, including weak economic data in China,
worries over Britain's exit from the European Union, and the
likelihood of a Federal Reserve interest rate hike before
After a second straight week of losses, the S&P 500 sits
about 2.5 percent below its all-time closing high set two months
"The exuberance you saw this summer as it got to new highs
was built on the premise that prices were leading a breakout in
earnings," said Bruce McCain, chief investment strategist at Key
Private Bank in Cleveland.
Investors "were looking for a pretty strong breakout in the
second half of the year to make up for a very weak first half,
and I just don't know that that's in the cards," McCain said.
With 34 S&P 500 companies reporting so far, third-quarter
earnings are expected to slip 0.4 percent, according to Thomson
But given how many better-than-expected reports typically
occur, investors are eyeing the quarter to potentially end with
earnings in positive territory.
S&P 500 profits fell 5 percent in the first quarter and 2.1
percent in the second.
"At the end of the day, it really is all about earnings.
Every economic data point filters down into earnings," said
Karyn Cavanaugh, senior market strategist at Voya Investment
Management in New York.
"When we actually move to positive, I think psychologically
that will be a point for investors to say, 'Wow, this really is
probably the best place to be in terms of investing. You have to
be in equities'," said Cavanaugh.
Strong earnings forecasts will be important for supporting
historically expensive stock valuations. The S&P 500 trades at
nearly 17 times earnings estimates for the next 12 months,
against its historical average of 15 times.
One potential obstacle to upbeat outlooks is the
strengthening U.S. dollar, which this week climbed to its
highest since March against a basket of currencies.
Multinational companies that generate business outside the
United States stand to see those sales reduced when translated
back into dollars.
Alan Gayle, director of asset allocation at RidgeWorth
Investments in Atlanta, said he will be watching "whether or not
businesses feel like they have their operating models working
well and under control, and if the dollar turns into the excuse
du jour for weak guidance or missing the quarter."
"At these valuation levels, the market gets to be
vulnerable," Gayle said.
(Reporting by Lewis Krauskopf; Editing by Nick Zieminski)