The strong rally Friday does not portend an improved outlook for the market response to upcoming earnings reports. Last week’s reports overall were disappointing. Earnings reports the next few weeks are still more likely to cause downdrafts for individual stocks, and the market overall, than to spark significant rallies.

Wells Fargo and JP Morgan

The S&P 500 surged 22 points on Friday following the Wells Fargo and JP Morgan Chase earnings reports. Those two earnings reports in themselves did not justify a 1.7% increase in the aggregate value of the 500 corporations in the S&P index.

Wells Fargo had a solid second quarter report. Profits were $0.82 a share compared to the average Wall Street forecast of $0.70 a share. Revenue, however, was lower than expected and up just 4.4% from the second quarter of last year.

Wells Fargo is the nation’s largest mortgage lender, and strength in that area along with other consumer loans boosted the company’s bottom line. Comments by management indicating an overall improvement to the balance sheet also helped boost the stock price.

Wells Fargo is one of the best run banks in America and the company navigated the debt implosion of 2008-2009 much better than most banks. The report reflected some positive trends for the banking sector, but with little implication for other sectors.

JPMorgan Chase is a different case altogether. Its stock plunged from $46 in late March to under $32 in early June. The huge trading loss was the primary reason.

On Friday, the stock rebounded 2% but is still only at $36.07. There were a lot of unusual items in the second quarter report, and although the outlook for the company’s core businesses is reasonably good, there were no great surprises. The stock action Friday was related to company-specific issues.

Technical Rally

The strong rally on Friday was not because Wells Fargo and JP Morgan results suggest that other companies will also produce good results that will give their stocks a boost. It was largely a technical rally in an oversold market.

The S&P 500 Index had been down six straight sessions, from a closing level of 1374 on July 3 to 1335 on Thursday. The good earnings reports from the banks served as an upward catalyst at the open, and in light trading, the move gained momentum as the day progressed and short-covering accelerated.

The S&P gain to 1357 on Friday was welcome, but simply puts the index back to the middle of the 1300 to 1400 range of the past few months.

Next Week’s Earnings

The momentum from Friday is unlikely to carry over into the new week.

There are about 240 companies due to report next week on our Earnings Calendar. Some of the key ones are noted in the table below.

Citigroup is the only big report on Monday. It is expected to post an earnings decline from last year. That would represent a relatively weak performance in an industry (financials) that is forecast to post an overall 50% earnings gain for the quarter.

Citibank itself may get a boost from its earnings report, but it is unlikely to be a catalyst for a broad market rally. The Bank of America report on Wednesday is more likely to impact perceptions of the prospects for the financial sector. Morgan Stanley and Goldman Sachs reports this week will provide details on the weak overall conditions on Wall Street.

Consumer sector stocks this week are likely to post unimpressive numbers. Coca-Cola and Johnson & Johnson on Tuesday are forecast to eke out minimal profits gains, as is American Express on Wednesday.

The outlook for technology sector stocks is mixed. Companies that aren’t cutting edge anymore and are dependent on overall economic trends are likely to reflect sluggish trends. Intel and Microsoft, still two of the top 16 market cap stocks, are forecast to post profit declines.

Google and eBay should post solid profit gains, but the growth trend in each has slowed. Google stock has been buffeted in the past even following seemingly good reports.

The industrial reports overall should be reasonably good. The sector is expected to post a 10% earnings gain this quarter, trailing only the financial sector.

The problem for the sector, however, is that the impact from any good news this quarter will be tempered by anxiety over global economic weakness in the quarters ahead. Adding to the concerns will be the impact of a strong dollar (which lowers the dollar value of overseas profits).

Guidance from industrial companies may be just as important as current quarter numbers. General Electric on Friday is the big industrial report for this week, but Johnson Controls on Thursday and Ingersoll-Rand Friday warrant attention.

Last Week’s Results Still Augur Poorly

The good earnings reports from Wells Fargo and JP Morgan on Friday don’t change the fact that a very large percentage of companies last week posted disappointing numbers.

Of the 30 companies on our Earnings Calendar last week, exactly 50% (15) reported earnings below expectations. That is extremely high. The percentage of company missing on earnings usually runs near 20%. Only 37% (11) beat estimates, while 13% (4) reported exactly as forecast.

The stock prices of larger companies such as Alcoa and Supervalu were hammered, as were many small companies that produced disconcerting results.

The earnings reports last week raise red flags about the prospects for the vast majority of companies.

The JP Morgan and Wells Fargo reports reflect some good underlying trends for the banking industry, but the key data are mostly company-specific and have little implication for consumer, technology, or industrial industries.

What It All Means

The Friday rally was technical. It was a strong bounce after six straight declines, sparked by two decent bank reports, and fueled by short-covering amidst light trading volume.

The S&P 500 now sits near the middle of its range the past few months.

This week’s earnings reports may bring some more good news for the financial sector. The underlying trend for financials can improve even amidst weakening global economic conditions. The housing sector is one of the few rebounding sectors in the US, and balance sheets can improve over time even with sluggish economic growth given good management.

The overall trend in earnings for most industries, however, is likely to be unimpressive.

Earnings excluding the financial sectors will be near flat for the second quarter. There will be plenty of mediocre reports with extremely cautious guidance, particularly from companies with global exposure.

The early indications from the non-financial companies last week were not encouraging, and the consumer, technology, and industrial sector reports this week are unlikely to be a stimulant to broad market moves.

Friday’s rally, unfortunately, doesn’t suggest that the market is poised to react positively to upcoming earnings reports.

--Dick Green

Founder and Chairman, Briefing.com