Earnings to get extra scrutiny from lack of data

SAN FRANCISCO (MarketWatch) — As earnings season ramps up in the coming week, investors will be looking closer at quarterly corporate metrics as a way of filling in the gaps from a lack of government data over the past two weeks.

Stocks rebounded late last week on signs of a thaw in the partial government shutdown and debt-limit deadlock, but talks stalled over the weekend. The Dow Jones Industrial Average (DJIA)  finished up 1.1% for the week and the S&P 500 Index (SPX)  gained 0.8%.

The Nasdaq Composite Index (COMP) , which had been down as much as 4% for the week, finished the week down 0.4%.

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The new focus was on discussions in the Senate between Harry Reid, the Democratic majority leader, and Mitch McConnell, the Republican minority leader.

That followed President Barack Obama's rejection Saturday of the latest proposal from House Republicans, and a failed attempt by Senate Democrats to raise the borrowing limit.

"The only story right now is D.C.," said Brad McMillan, chief investment officer for Commonwealth Financial, which has more than $71 billion under management. D.C. remains a focus not just because of the disruption being caused by political wrangling, but the shutdown has also choked off a prime source of economic data.

After two weeks of a partial government shutdown, several indicators of economic health have been delayed. The lack of government statistics will shift even more scrutiny to earnings reports.

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One recent example of how the shutdown wormed its way into earnings was a profit warning from Silicon Graphics International Corp. (SGI) . SGI cut its outlook, citing lost revenue from contracts that were frozen late in the September-ending quarter in the run-up to the shutdown. Shares of the large-scale computing company dropped nearly 10% on Friday following the late Thursday warning.

With nine Dow components and more than 60 companies on the S&P 500 reporting in the coming week, expect data-hungry investors to devour those reports for clues on where the economy is heading.

"One of the things that worries me is not getting statistics," McMillan said. "This makes people worry especially if financials [earnings] are coming in weaker than expected."

Financial earnings figure heavily in the coming week with reports from Dow components American Express Co. (AXP)  and Goldman Sachs Group Inc. (GS) , along with reports from Citigroup Inc. (C) , Bank of America Corp. (BAC) and Morgan Stanley (MS) .

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While adjusted earnings from J.P. Morgan Chase & Co. (JPM)  and Wells Fargo & Co. (WFC)  cleared consensus levels on Friday, J.P. Morgan's report was marred by more than $9 billion in litigation expenses, while mortgage banking results — Wells Fargo's leading business — came in weaker than expected.

That weakness in mortgages could signal a reluctant consumer in the wake of economic uncertainty, much in the way growth was stymied just before the fiscal cliff last year. On Friday, a report showed consumer-sentiment levels at their lowest since January.

While banks will be taking center stage on earnings, a number of consumer-focused companies will also be reporting. In that area, some of the big earnings reports will be coming from Coca-Cola Co. (KO) , Johnson & Johnson Inc. (JNJ) , PepsiCo Inc. (PEP) , UnitedHealth Group Inc. (UNH) , Verizon Communications Inc. (VZ) and Philip Morris International Inc. (PM) .

"Consumer discretionary earnings will be an interesting bellwether on what's been driving growth," McMillan said. Companies specific to the consumer discretionary sector reporting in the coming week include Chipotle Mexican Grill Inc. (CMG) , Mattel Inc. (MAT) , Interpublic Group of Cos. (IPG)  and Omnicom Group Inc. (OMC) .

One piece of data that concerns McMillan, which came out in the past week, was disappointing September sales data from Gap Inc. (GPS) . "That's not a positive sign," he said. "I wonder if it signals if people are pulling back. Consumer confidence is down, not as much as thought, but Gap results worry me." Gap shares fell nearly 7% on Friday.

So far, with 31 S&P 500 companies having already reported earnings, the blended earnings growth rate stands at 0.8% for the third quarter, according to John Butters, senior earnings analyst at FactSet. At the end of September, the expected earnings growth rate was at 3.1%, more than half of what was expected at the beginning of that quarter.

Of the 110 companies on the index that have issued earnings guidance for the quarter, 91 of them, or nearly 83%, are guiding below the Wall Street consensus, the highest negative outlook percentage since FactSet began tracking the numbers in 2006.

Other notable earnings fall toward the tech end of the spectrum with reports from Yahoo Inc. (YHOO) , Intel Corp. (INTC) , International Business Machines Corp. (IBM) , eBay Inc. (EBAY) and Google Inc. (GOOG) .

Industrials also play a large role in the coming week with Honeywell International Inc. (HON) , Textron Inc. (TXT) , CSX Corp. (CSX) , Union Pacific Corp. (UNP)  and General Electric Co. (GE)  reporting.

In a recent Goldman Sachs report, the firm picked 20 stocks that are expected to drive revenue growth in the third quarter. Companies from that list reporting in the coming week are UnitedHealth, Google and Verizon.