By Wallace Witkowski, MarketWatch
SAN FRANCISCO (MarketWatch) -- Stock strategists are gravitating
toward a nebulous middle ground -- where bulls seem more bearish,
and bears more bullish -- as investors brace for a hike in interest
rates sometime in the next year future and corporate earnings
appear to be regaining their legs.
Stocks snapped a five-week winning streak Friday, with the Dow
Jones industrial Average (DJI) down 0.9%, the S&P 500 Index
(SPX) falling 1.1%, and the Nasdaq Composite Index (RIXF) off by
0.3% for the week. Atwo-day Federal Open Market Committee meeting
looms before investors in coming days.
Investors will be on the lookout for the two magic words of
"considerable time" in the Fed's FOMC policy statement. That
phrasing relates to when the Fed expects to begin raising interest
rates from near-zero levels. Omission of the phrase from the
statement could indicate a hike sooner than investors have been
expecting.
Dan Greenhaus, chief strategist at BTIG, who thinks the
"considerable time" language might survive in the September
meeting's policy statement, said the relentless move in stocks
since 2011 has sucked in the last of the bearish strategists, some
of whom are forecasting notable gains by the end of the year.
"Since we, like others, haven't gotten absolutely more bullish,
this has left us relatively more bearish," Greenhaus said.
Bearish strategists have continued to loosen up and hike their
targets. This past week noted bear Gina Martin Adams at Wells Fargo
Securities dropped her 1,850 year-end target in favor of a 12-month
target of 2,100, as earnings strength is beginning to counter the
fear of Fed volatility. Similarly, David Bianco at Deutsche Bank
raised his target to 2,050 from 1,850.
Holdouts to raising targets are fewer, but remain. Brian Belski
at BMO Capital Markets is sticking by his 1,900 target, emboldened
by others' target raises, and convinced that stock prices have
gotten ahead of themselves and need earnings to catch up,
especially with the Fed wrapping up its easing programs.
BTIG's Greenhaus is also wary of how investors will digest Fed
policy going forward.
"As we increasingly approach the end of 2014, the bias does
indeed remain to the upside but the fact remains that we're closing
in on tighter Fed policy and that is often not good for equities,"
Greenhaus said.
With QE training wheels off: Will earnings provide momentum?
In the slow time between earnings season peaks, a few notable
company will be releasing results this week.
Adobe Systems Inc. (ADBE) reports on Tuesday. FedEx Corp. (FDX),
General Mills Inc. (GIS) , and Lennar Corp. (LEN) report on
Wednesday. Then, on Thursday, Oracle Corp. (ORCL) , ConAgra Foods
Inc. (CAG) , and Red Hat Inc. (RHT) release quarterly results.
Following that it'll be less than a month before we're back in
the thick of earnings season in October.
Currently, about 75% of companies on the S&P 500 offering
quarterly outlooks are guiding below the Wall Street consensus,
according to John Butters, senior earnings analyst at FactSet.
While that may seem high compared to the five-year average of 66%,
it's below the 83% from this time last year, and on par with the
75% from three months ago heading into this past earnings
season.
In fact, corporate outlooks are at their most optimistic in
nearly two years, according to Savita Subramanian, Bank of America
Merrill Lynch equity and quant strategist, in a recent note.
"After growing increasingly negative on earnings guidance since
2010, management is finally sounding more constructive,"
Subramanian noted. "The 3-month ratio of above-consensus to
below-consensus earnings guidance ticked up to 0.60 as of the end
of August, just below average and at the highest level since
December 2012."
Third-quarter earnings for the S&P 500 are currently
expected to grow by 6.2%, down from an estimate of 6.5% a week
ago., according to Butters.
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