Earnings Season to Get Underway

Now that it’s 2005, is the late 2004 rally over?

With investor uncertainty increasing over the last week, it will take a series of strong earnings reports for Wall Street to continue its holiday rally through the rest of January.

The so-called January effect -- in which new money coming into the market after Jan. 1 is thought to spur increased buying and boost prices -- was nowhere to be found last week, as investors instead bailed out of risky stock holdings and drove prices lower. And the December jobs report, released Friday, was muddled enough to make it difficult to divine a direction for the economy and the stock market.

So it now falls to earnings season, which officially begins today, to give Wall Street a direction.

With last week’s sell-off, analysts said it probably would be easier for the market to rise on good news because many now consider stocks to be oversold.

But investors are also likely to send a stock lower if the company’s earnings report fails to meet expectations.

Earnings growth is expected to be anywhere from 10% to 15% over the fourth quarter of 2003, so there’s a good chance there will be more positive surprises than negative. And that could give Wall Street the push it needs to resume its rally.

Last week, profit taking from the postelection rally and concern over inflation and interest rates pushed stocks substantially lower. For the week, the Dow Jones industrial average fell 1.7%, the Standard & Poor’s 500 index lost 2.1% and the Nasdaq composite index dropped 3.4%.

The release last week of the minutes from the Federal Reserve’s Open Market Committee meeting in December gave Wall Street important insights into the Fed’s thinking -- and raised concerns about the possibility of higher inflation and interest rates.

Prices will again come into focus Friday as the Labor Department releases its producer price index, a measure of how much industry pays for goods and services, for December.

The PPI is expected to fall 0.1%, a reflection of lower energy prices for most of December. With food and energy prices taken out of the equation, so-called core PPI is expected to rise 0.2%, the same as November. A higher increase in core PPI probably will worry many investors concerned about inflation.

In other economic reports, the Commerce Department will release its report on retail sales for December on Thursday. Economists expect sales to rise 0.7%, compared with a 0.1% increase in November. However, putting auto sales aside, retail sales were expected to rise 0.4%, compared with 0.5% in November.

Alcoa Inc. traditionally kicks off earnings season as the first major company to report earnings. Looking at recent quarters, however, investors can be forgiven if they would prefer another high-profile company to go first.

The aluminum company is expected to earn 41 cents a share for the fourth quarter, up from 37 cents a year ago. The company’s stock has fallen 20.1% from its 2004 high of $38.40, closing Friday at $30.69. After disappointments the last two quarters, and with raw materials costs a concern because of the weak dollar, Alcoa could have a difficult quarter once again.

Chip maker Intel Corp., which issued a very positive mid-quarter update last month, is a more likely candidate to surpass Wall Street profit forecasts. The Dow component is expected to earn 31 cents a share. Intel shares have slid steadily over the last year, falling 33.4% from their 2004 high of $34.24 to close Friday at $22.80.

Apple Computer Inc. has seen its stock price climb in the opposite direction from Intel, rising steadily from a 2004 low of $21.79 to close Friday at $69.25 -- a 217.8% increase. Much of that can be attributed to the success of Apple’s iPod music player, sales of which boomed this holiday season. Apple is expected to earn 46 cents a share, a big jump from the 16 cents it earned a year ago.

From Associated Press

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The Week Ahead

Today

* MacWorld Expo opens in San Francisco.

* Alcoa Inc. and Genentech Inc. release quarterly earnings.

Tuesday

* Intel Corp. releases quarterly earnings.

Wednesday

* North American International Auto Show in Detroit opens to the public.

* Supreme Court hears oral arguments in securities fraud case.

* Commerce Department reports on international trade for November.

* Treasury reports on federal budget for December.

* Apple Computer Inc. releases quarterly earnings.

Thursday

* Commerce Department reports on retail sales for December.

* Labor Department reports on weekly jobless claims.

* Freddie Mac, the mortgage company, reports on mortgage rates.

* Sun Microsystems Inc. releases quarterly earnings.

Friday

* Commerce Department reports on business inventories for November.

* Labor Department reports on producer price index for December.

* Federal Reserve reports on industrial production for December.