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January 14: Stocks Likely to Remain Tentative

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With not much on the economic calendar, stocks will likely remain in a tentative mood ahead of earnings results from big banks later this week. Media reports about tepid demand for Apple’s (AAPL) iPhone 5 could also be material to today’s trading action.

Expectations for fourth quarter earnings that had been coming down throughout the quarter went down some more last week following the major foreclosure related settlement. As a result estimates for all major banks came down, but the downward adjustment was particularly notable for Bank of America (BAC), which saw a roughly $2 billion swing in its fourth quarter earnings estimate. The Finance sector as a whole which was expected to achieve earnings growth of +9.7% in the fourth quarter is now expected to see only +2% growth instead.

We got a solid earnings and revenue beat from Wells Fargo (WFC) last week, driven largely by the bank’s strong mortgage business, only partly offset by weakness in its net interest margin. This means that other banks that have smaller mortgage businesses will be even more at the mercy of the unfavorable net interest margin backdrop. We will know more as Bank of America, J.P. Morgan (JPM), Citigroup (C) and many of the major regional banks report results this week, but expectations are low enough that positive surprises may not be hard to come by.

Apple does not report quarterly results till Wednesday next week, but the demand outlook for its flagship iPhone 5 appears less than robust. Media reports indicate that the company has cancelled orders for key components. The stock has been under pressure over the last few months as a number of analysts have been cutting their estimates in recent days. Given Apple’s enormous weight in the market – it accounts for roughly a quarter of all Tech sector earnings – the company’s travails will have a much broader impact.

Stocks have made impressive gains lately. But for the gains to be sustained, we need confirmation from the earnings front. I wouldn’t take much to produce positive surprises given how low expectations have fallen. But even more so than prior reporting cycles, guidance will be key this time around. The reason is that while expectations for the fourth quarter came down over the last few months, we have yet to see any material adjustments to estimates for 2013. Guidance from management teams will determine whether those expectations remain in place or come down.

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