Earnings: Out With Leaders, in With Laggards

 | Jul 15, 2013 | 7:00 PM EDT
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This week marks the end of reports from the big Wall Street banks with Citigroup (C) on Monday, Bank of America (BAC) and Goldman Sachs (GS) on Tuesday, and rounding it off with Morgan Stanley (MS) on Wednesday before the markets open in New York. And the week begins earnings season for the technology sector -- Information Technology in the Standard & Poor's sector system -- with IBM (IBM) and Intel (INTC) on Wednesday and Microsoft (MSFT) and Advanced Micro Devices (AMD) on Thursday.

The shift in earnings growth couldn't be more pronounced and it has big implications for the market as a whole since financials have been one of the leading sectors in market rallies in 2013 and technology stocks have been one of the laggards. As of Friday, Standard & Poor's calculated that Wall Street analysts were looking for 12.8% earnings growth for financial companies in the quarter from a year earlier.

On the other hand, by S&P's calculations, analysts saw the technology sector heading for a 4.4% drop in earnings from the year earlier. Earnings for computer and peripheral companies were projected to fall by 22.9% and for semiconductor companies by 17.8%. Apple (AAPL) by itself is responsible for a big part of the drop in earnings for computer and peripheral makers. Analysts are looking for a drop to $7.31 a share from $9.32 a share from a year ago. That's a drop of 21.5%.

But Apple isn't alone. (Apple doesn't report until July 23, by the way.) On July 10 market researcher Gartner reported that shipments of PCs would fall 10.9% from a year earlier. That would make this the fifth straight quarterly decline for PC makers.

The story isn't any better for producers of semiconductors or semiconductor equipment. (And why should it be? If PC makers aren't selling PCs, they aren't buying chips; and if chip producers aren't selling chips, they aren't buying equipment to make chips.)

Once you get past IBM, earnings projections for technology companies reporting this week are brutal. (And IBM with a projected 7.7% growth rate is nothing to write home about -- except in comparison.) Wall Street analysts expect Microsoft to manage a barely positive 1.95% growth rate in the quarter. Intel is projected to show a 27.3% drop in earnings. And Advanced Micro Devices is projected to swing from earnings of 6 cents a share a year ago to a loss of 12 cents a share.

I don't think the switch from financial to technology earnings is enough to sink the rally that has taken U.S. stock indexes to new all-time highs again and again recently. (The July 15 close at 1682,50 on the S&P 500 is the third daily all-time high in a row for the index.) The market is moving up on its belief in a delay to any beginning of reduction in bond buying by the Federal Reserve and on global cash flows creating a demand for dollars and dollar-denominated assets.

But really bad news for the technology sector -- news that's so bad that it won't fit into the Wall Street earnings surprise paradigm where weak earnings beat expectations for wretched earnings -- will take some of the animal spirits out of the market. I wouldn't be surprised to see a mild pull back in stock prices as earnings season moves from leading financials to lagging technology stocks.

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