By Chuck Mikolajczak
NEW YORK (Reuters) - Earnings season shifts into high gear next week, and with nearly one-third of S&P 500 names set to post results, investors hope the news provides a catalyst to buy stocks and leave the market's recent weakness in the dust.
Several behemoths, including Apple, the largest U.S. company by market value, as well as Microsoft, McDonald's (MCD.N) and AT&T (NYS:T), are due to report earnings.
They'll be accompanied by highfliers like Netflix and Facebook, giving the first real cross-section of the state of corporate America as temperatures rise across the country and investors hope to put the cold weather behind them. Strategists will also be looking for clues on how badly China's slowdown hits U.S. corporate results.
The first batch of earnings came out as equities were working their way through a selloff led by trading-crowd favorites like Netflix and the biotech stocks. With the late-week recovery, the hope is that the recent volatility has ebbed. If poor results dominate next week's action, that could reignite the selling.
"We are still off our highs, but we still remain in an uptrend so it would not surprise me to see sideways action," said Andre Bakhos, managing director at Janlyn Capital LLC in Bernardsville, New Jersey.
"If we were to have a set of earnings releases that were well off expectations to the downside, that could create hesitation in the market."
A few themes will dominate in the coming week: The outlook for China, the rotation to slower-growing stocks, and results from high-flying trading favorites.
S&P 500 companies' first-quarter earnings are projected to have increased 1.7 percent from a year ago, Thomson Reuters data showed. The forecast is down sharply from the start of the year, when profit growth was estimated at 6.5 percent, but has climbed from a low of 0.6 percent reached on Wednesday.
That jump occurred despite notable disappointments from IBM Corp (IBM) and Google Inc (GOOGL.O). Even with those two lackluster reports, equities still mostly rallied on Thursday.
The benchmark S&P index rose 2.7 percent for the holiday-shortened week, helping the index recapture nearly all of the declines suffered in the previous week. The U.S. stock market will be closed for Good Friday.
THE CHINA CHALLENGE
There have been warning signs, with IBM saying this week that its disappointing quarterly revenue was due to worsening sales in the world's second-largest economy and other emerging markets. Earlier in the week, China reported growth came in at its slowest pace in 18 months.
Qualcomm's (QCOM) revenue for its fiscal year ended September 29, 2013, showed China accounted for nearly half of the company's revenue. Options activity in Qualcomm has been defensive in nature, with investors paying more money to hedge against a fall than a rise in the stock's price.
But strategists at Goldman Sachs see this as a buying opportunity, believing the options data shows investors are overly concerned about the quarter.
Apple Inc (AAPL) also derives 13 percent of its sales from China, according to Thomson Reuters data. The company was once a favorite among momentum investors looking to capitalize on swift price gains, but the stock dropped sharply from all-time highs reached in late 2012. It has been mostly stuck in a range for the last year.
StarMine expects Apple to exceed earnings estimates by 1 percent. Notably, Apple has not benefited from a rotation into older tech stocks like Microsoft has. Its shares are down 6.1 percent on the year.
BIG MO? UH, NO
Investors are gearing up for wild swings in those names next week. Trading in Facebook options expiring next Friday suggest investors expect about a 12 percent move in the stock's price by the end of next week. Weekly options are often used in advance of a major event like earnings. Similarly, Netflix options also suggest a 12 percent move.
After a spectacular performance in 2013, the selloff in many of these stocks over the past few weeks has contributed to the market's volatility. Whether they affect the broader market may determine how well stocks trade next week.
The Nasdaq biotech index (^NBI) is down nearly 19 percent from its closing high on February 25 while the Global X Social Media Index ETF (SOCL.O) is down 18 percent from its March 6 high. However, both have bounced off drops of more than 20 percent that had sent each into bear market territory.
With the nervousness created by the declines in the momentum names, investors have rotated into more defensive names.
"What happens at some point is (momentum names) become disassociated from the market at large. People see this happening, they become scared, and they start selling other companies as well," said Stephen Massocca, managing director at Wedbush Equity Management LLC in San Francisco.
"It gets to a point where that stops happening and the rest of the market - outside of these crazy names - is not that overvalued."
Some of those names, including Dow components Microsoft (MSFT), DuPont (DD.N) and Travelers (TRV.N), are among those identified by Credit Suisse quantitative analysts as potential "contrarian" picks as they're among the least loved by Wall Street analysts.
All three are also considered undervalued by StarMine's measure of intrinsic value that looks at the long-term growth expectations for these names. Microsoft, for example, is the third-best performer in the Dow this year, having gained 7 percent for the year.
(Wall St Week Ahead appears on Thursday because the market will be closed for Good Friday. Questions or comments on this column can be sent via email to: charles.mikolajczak(at)thomsonreuters.com)
(Reporting by Chuck Mikolajczak; Additional reporting by Caroline Valetkevitch; Editing by Jan Paschal)