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UPDATE: Tech, bank earnings to test economic recovery

UPDATE: Tech, bank earnings to test economic recovery

07/13/2014

By Wallace Witkowski, MarketWatch

SAN FRANCISCO (MarketWatch) -- Investors will get an early preview on whether corporate America backs a rosier economic picture this week as key players in the S&P 500's two largest sectors -- tech and financials -- report quarterly results.

Of the seven Dow Jones Industrial Average (DJI) components reporting this week, four represent the tech or financial sectors. Similarly, roughly half of the S&P 500 Index (SPX) companies reporting earnings this week fall either in the tech or financial camp.

While some may argue the bar is always lowered for companies leading up to earnings season, performance expectations are higher than usual following the pass investors gave many companies in the weather-beaten first quarter and stocks trading near record-high valuations.

Stocks are coming off a rough week with the Dow industrials finishing down 0.7%, the S&P 500 off 0.9%, and the Nasdaq Composite Index (RIXF) declining 1.6%. Even though Federal Reserve minutes revealing the central bank will end monthly bond purchases in October provided some lift, other factors including renewed worries about Portugal and a selloff in so-called momentum stocks put pressure on markets.

Second-quarter earnings growth for the S&P 500 stands at 4.6%. If the average "beat" over the past four years applies to this season, we could be looking at 7.7% growth by the end of the season, notes John Butters, senior earnings analyst at FactSet. Earnings, however, will still take a back seat to other factors.

Show me the outlook (and revenue)

"It's cliche but true...it's all about the guidance," said Nicholas Colas, chief market strategist at ConvergEx. Also, earnings "beats" will continue to be taken with a grain of salt in favor of revenue growth, which is seen by many as a more accurate metric of corporate health amid accounting tricks and stock buybacks.

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