Stocks Start the Week Strong, But Earnings Will Be Critical

By Markets Fool.com

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

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Stocks appear to be regaining their composure on Monday morning, following Friday's sell-off, with the Dow Jones Industrials Average and the broader S&P 500 both up Over 1% at 11:30 a.m. EDT.

In explaining the rebound, market watchers appear to be focused on Morgan Stanley's positive earnings surprise. The investment bank's first-quarter adjusted earnings per share of $0.85 and revenue of $9.8 billion came in well ahead of the consensus forecast of $0.78 and $9.2 billion. In response, investors pushed Morgan Stanley's shares up nearly 1% at 11:30 a.m. EDT. Morgan Stanley's "beat" follows a blockbuster earnings report last week from the only other pure-play global investment bank, Goldman Sachs .

All the same, Morgan Stanley's uptick this morning doesn't match the Dow's, and particularly those of some Dow components that are more closely tethered to the global economy rather than global markets per se, including Chevron (+2%) and Boeing (+2.4%). That might be linked to news that China reduced banks' reserve requirements on Sunday -- the second such cut in as many months -- in a bid to spur bank lending and, ultimately, economic growth.

Closer to home, market participants will be heavily focused on earnings this week, with more than a quarter of the companies in the S&P 500 scheduled to announce results. That includes technology heavyweights Google, Facebook (Wednesday) and Amazon.com (Thursday), I know Amazon isn't strictly part of the technology sector, but the association in terms of perception is very strong.

Seven Dow stocks will report earnings this week:

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Tuesday

Coca-Cola

Wednesday

Boeing, McDonald's, Verizon

Thursday

Caterpillar, 3M, Procter & Gamble

Uncertainty regarding earnings appears to be one factor keeping the market from new highs. Current estimates have S&P 500 (operating) EPS falling 1% year over year in the first quarter, following a 5% decline in the fourth quarter. That would mark the first back-to-back falls in earnings since the second half of 2012, which was a turbulent period for markets. Mind you, stocks are up 46% since the end of 2012, so an "earnings recession" doesn't necessarily spell disaster for stocks.

Still, those gains far outpaced earnings growth over the same period: Using the current estimate for the first quarter, trailing 12 months earnings per share are only 16% higher relative to the 2012. In other words, valuations have risen, and with a trailing price-to-earnings multiple of 18.5, the S&P 500 is hardly at bargain levels -- an observation that only becomes more evident when earnings growth stalls (or worse yet, reverses!).

Finally, we have a macro wild card for the week, courtesy, again, of Greece. Eurozone finance ministers are scheduled to convene Friday to discuss Greece, even as the nation's finances continue to deteriorate. There is precious little time to release the $7.2 billion tranche in aid Greece desperately needs, yet Greek officials are curiously nonchalant toward the negotiations and technical discussions required to obtain those funds.

The Greek strategy appears to be premised on the notion that the other eurozone nations want to avoid a suicide pact, whereby a Greek default and/or exit from the eurozone would imperil the group itself. If so, it's a high-risk gamble that could foster plenty of volatility -- regardless of the ultimate outcome.

The article Stocks Start the Week Strong, But Earnings Will Be Critical originally appeared on Fool.com.

Alex Dumortier, CFA has no position in any stocks mentioned. The Motley Fool recommends Chevron and Goldman Sachs. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.