Earnings will decide whether the market continues to hit new highs after another week of records

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Traders work on the floor at the New York Stock Exchange.

Brendan McDermid | Reuters

With the Chinese trade deal out of the way, earnings could be the biggest driver for stocks in the week ahead, as big tech, financial, consumer and industrial companies report.

So far, the early rush of earnings are beating estimates at a pace of about 70%. Just a few dozen S&P 500 companies report in the four-day trading week, including IBM Tuesday and Intel on Thursday. Johnson & Johnson reports Wednesday; Procter & Gamble is Thursday, and American Express releases results Friday. The stock market is closed Monday for the Martin Luther King holiday.

President Donald Trump travels to Davos, Switzerland for the World Economic Forum, where he speaks Tuesday. With the China trade deal signed this past Wednesday, strategists say they are now watching for any signs of a bigger trade row brewing between the U.S. and Europe.

There are a few economic reports, including existing home sales Wednesday; leading indicators Thursday, and the Markit PMI data for manufacturing and services on Friday.

But it’s earnings, where investors will take the pulse of corporate America, and decide whether forward guidance is justifying the stock market’s record highs and price earnings ratio of more than 18.5. The S&P 500 gained nearly 2% in the past week, its best week since August. The S&P 500 closed at a record 3,329 Friday and is now up about 3% since the start of the year.

The Dow and Nasdaq also ended the week at new highs. The Dow ended up 1.9% for the week, at 29,348. The Nasdaq rose 2.3% in the past week, ending at 9,388.

Jonathan Golub, chief U.S. market strategist at Credit Suisse, said the fourth quarter could be a turning point for earnings, after a poor performance in 2019. So far, earnings are down about 0.8% this quarter, based on actual releases and estimates, according to Refinitiv. If not for the drag from energy companies, profits for S&P 500 companies would have been 1.9% higher.

“2019 was a year of lousy earnings, and the fourth quarter is the end of a lousy year,” said Golub. “I think earnings surprises will be fine, but what the real story here is, it looks like magically the 2020 numbers are going to be much, much stronger than 2019.”

Golub said there are two big themes this earnings season. “The first one is tech-related companies. Many of the mega caps had okay earnings, but their margins were under a lot of pressure and it subtracted earnings growth in 2019. Those trends are supposed to reverse. So what was a negative because of easy comps becomes a positive,” Golub said. “The same thing with the energy sector which was a disaster in terms of earnings growth in 2019.”

He said the market rally can continue in part because investors are not yet on board with the earnings story.

“While everybody is looking at the fourth quarter, I think they’re not really reading the right script, and the script they should be reading was this was the last quarter where tech margins and energy sector headwinds are overwhelming the market,” he said.

The hearings on Trump’s impeachment are so far ignored by markets and will be underway in the Senate. While the market continues to shrug it off, traders are monitoring the situation for any change in tone.

“Will there be new evidence/witnesses at the Senate trial to make it politically significant?,” wrote Deutsche Bank foreign exchange strategist Alan Ruskin. “Let’s not forget that for many voters, the President seems to be the main motivator for voters on both sides of the political spectrum — for and against. This argument runs along the lines that Trump is running against himself/’the anti-Trump’, and, the election will be heavily impacted by which Democrat candidate least impacts the ‘anti-Trump’ vote — a view that some argue tends to support centrists like Biden.”

Week ahead calendar

Monday

Martin Luther King holiday

Stock market closed

Tuesday

Earnings: Netflix, Haliburton, IBM, Capital One, TD Ameritrade, United Airlines

Wednesday

Earnings: Johnson and Johnson, Abbott Labs, Citrix, Raymond James, SLM, Bancorp South, Baker Hughes, Northern Trust, Texas Instruments, Fifth Third, Comerica

9:00 a.m. FHFA home prices

10:00 a.m. Existing home sales

Thursday

Earnings: Procter and Gamble, Intel, Union Pacific, American Airlines, Comcast, Keycorp, Kimberly Clark, Huntington Banchshares, Southwest, Travelers, ETrade, JetBlue, Discover Financial, Intuitive Surgical, Skyworks

8:30 a.m. Initial claims

10:00 a.m. Leading economic indicators

Friday

Earnings: American Express, Raytheon, Air Products, Synchrony Financial, NextEra Energy

9:45 a.m. Manufacturing PMI

9:45 a.m. Services PMI

Source: CNBC

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