The Dow, over which the institutional bulls and bears have engaged in three-month battle for 8,000, still looks very heavy at around 8,500. And with good reason. The Q4 2008 earnings season approaches and financial institutions - - and typical investors - - are bracing for the worst.
In keeping with NYSE tradition, Alcoa (NYSE: AA) kicks-off the Q4 2008 earnings season, reporting results today at 5 p.m. EST. See my BloggingStocks colleague Trey Thoelcke's analysis for a preview.
Economists see 6th straight quarterly earnings decline
In general, the U.S. recession and constrained credit conditions will lead to the sixth, consecutive quarter of earnings declines in the S&P 500, many economists agree.
Economists surveyed by Bloomberg News expect S&P 500 Q4 2008 earnings to fall 20%. Further, the S&P 500 p/e was 16 at the start of Monday's trading - - its lowest level since February 1991.
Economist David H. Wang, who did not participate in the Bloomberg survey, said he would be happy if S&P earnings fell 'only' 12-15% in Q4 2008.
"Obviously, we saw a large slowdown in commercial activity and the onset of the financial crisis in Q4, so the earnings numbers will not be good," Wang said. "In this context, an S&P earnings decline of less than 15% would be considered a moral victory."
Economist Peter Dawson agreed. "The market, being a 6-9 month lead indicator, has already factored-in the Q4 earnings data, but that doesn't mean the market can't move substantially lower, if we start seeing 20% earnings declines across the board," Dawson said. "Earnings for Q1 and Q2 2009 don't look that good either, so the market will probably interpret an as-expected earnings quarter as no signs of economic growth, and that will weigh on stocks."
Market Analysis: As economist Wang noted, a 12-15% year-over-year quarterly earnings decline would be a moral victory, a 10% decline an outright victory. The view from here argues that the outlook for U.S. stocks and the U.S. stock market is bearish for at least for the next six months, and Dow 8,000 is likely to come under pressure again, particularly with a 20% decline in Q4 earnings.
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