As U.S. earnings season chugs along, corporate profits continue their healthy gains - but since they're getting a little less surprising, the market reaction has been lukewarm.
The S&P 500 fell last week, its first weekly decline since November, despite strong earnings from bellwether companies such as Apple Inc., Google Inc. and General Electric Co. It's not that most companies are failing to beat expectations, but that they may not be blowing them out like they were earlier in the cycle.
While the expectation is for a healthy 31.9 per cent year-over-year gain in fourth-quarter S&P 500 profits, "the rate of earnings surprises has been moderating in recent quarters," says economist Robert Kavcic at BMO Nesbitt Burns.
In the third quarter, 72 per cent of companies beat expectations, according to Thomson Reuters. Mr. Kavcic says that is six percentage points above the historical norm, but down from early 2010 when expectations were a lot more depressed.
"It's normal to see the rate of earnings surprises moderate as we move further along into the cycle," he said. "Expectations catch up with the reality of a more favourable profit backdrop, and as a result, the pace of stock price appreciation slows."
There will be plenty of material to test that theory this week, as more than 900 companies on U.S. exchanges release earnings. American Express Co. and McDonald's Corp. are slated for Monday; Verizon Inc., Tuesday; Boeing Co., ConocoPhillips Co. and Netflix Inc., Wednesday; AT&T Inc. and Caterpillar Inc., Thursday; and Chevron Corp., Friday.
The U.S. IPO market gets into high gear this week with two high-profile offerings, notes research firm Renaissance Capital. Online content company Demand Media will be the largest Internet IPO since Google, while Nielsen Holdings could be the largest private equity-backed deal in at least 10 years, Renaissance says. Both are scheduled to price Tuesday night for Wednesday trading.
The Canadian earnings season kicks off in earnest with Canadian National Railway Co. (Tuesday) and Canadian Pacific Railway Ltd. (Wednesday), plus, on Thursday, the first report from Potash Corp. of Saskatchewan Inc. since the hostile bid from BHP Billiton was spiked by the federal government.
Analysts at UBS Securities Canada Inc. estimate low double-digit revenue gains and expanding operating margins for each of the railways, leading to 22-per-cent earnings-per-share growth at CN and 35-per-cent EPS growth at CP.
Potash Corp.'s full-year 2010 EPS guidance is in the $5.75 to $6 range, say the UBS analysts, who expect strong results thanks to seasonally higher volumes and higher fertilizer prices.
The Canadian economic-data front is relatively quiet this week, with Tuesday's consumer-price index data the likely top attention-getter, says Peter Buchanan of CIBC. He predicts a rise of 2.6 per cent in the headline number for 2010, thanks to higher energy costs. The core inflation number, which strips out energy and other more-volatile goods, should come in at 1.6 per cent for the year and "provide comfort … that inflation remains contained at the broad-brush level."
The biggest U.S. economic event of the week should be the Federal Open Market Committee's interest-rate decision on Wednesday, but few expect much change in the Fed's stated desire to keep rates low for an extended period.
Friday's GDP release will be the biggest of the U.S. indicators, but there will be plenty of housing-market data with the Case-Shiller housing-price index on Tuesday, new home sales Wednesday and pending homes sales Thursday.