Wall Street focuses on Facebook, Apple, Fed

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Wall Street focuses on Facebook, Apple, Fed

NEW YORK - The Federal Reserve meeting this week is not on the minds of as many people as when it met in September, but its decision to do nothing last month is providing the fuel for more share gains in Apple and Facebook, which will report results.

Facebook is only slightly off an all-time high, and Apple has recovered somewhat from losses earlier in the year after investors have poured money back into stocks, bringing the S&P to successive records that some say may not be supported by corporate results.

The numbers from Facebook and Apple are among those that will be closely watched - and investors say at their current levels, the margin for error is slim.

Nearly half of the S&P 500 companies have reported third-quarter results so far, and 69 percent have beaten Thomson Reuters I/B/E/S estimates. The technology sector has led the way, beating expectations 84 percent of the time. The most recent companies to do so were Amazon.com and Microsoft, whose results led the S&P to close at an all-time high of 1,759.79 on Friday.

Companies already stretched to high price-to-earnings multiples, like Facebook, will have to outpace expectations to keep investors buying.

“There is not a lot of room for error, especially with these names with a lot of momentum behind them. You have to beat the numbers pretty handily,” said Daniel Morgan, vice president and senior portfolio manager at Synovus Trust Company in Atlanta, who focuses on tech stocks.

That’s where the Fed comes in. Some of the riskier names and high-dividend payers had pulled back in the late summer, anticipating the Fed would begin reducing monthly bond purchases beginning at its September meeting.

But that did not happen - and since then, stocks have been unimpeded, save for the 16-day government shutdown that didn’t scare too many people.

The Federal Reserve will hold its October meeting on Tuesday and Wednesday.

But earnings will overshadow the central bank, as it is expected to maintain its current policy, in part because of the economic hit that resulted from the shutdown.

“So far, this earnings season has been pretty balanced and on the positive side,” said Paul Mangus, head of equity strategy and research for Wells Fargo Private Bank in Charlotte, North Carolina. “If that continues into next week, and we’re not expecting anything out of the Fed, it could continue to support markets on current levels.”

Mangus noted that expectations for the third quarter were low, so beating earnings estimates is not a particularly bold sign of strength. Many companies were able to create earnings without actual revenue growth, so 46 percent of results so far revealed lower-than-expected revenue growth.

“The sales numbers have been anemic. We’re pretty flat in terms of across the board revenue,” Mangus said.

For last week, the Dow was up 1.1 percent, the S&P rose 0.9 percent and the Nasdaq gained 0.7 percent.

About 24 percent of S&P 500 companies will report third-quarter earnings this week, among them heavy hitters such as General Motors and Visa.

But Apple, reporting on Monday, and Facebook, on Wednesday, are likely to be the most-watched names.

“These are big names that people like to look at and they create a feeling about the market,” said Synovus Trust’s Morgan.

He said he will be looking to see if Apple has reversed the negative trend in iPad sales of the second quarter.

But, he noted, Apple’s multiple is low, at a 12.25 price-to-earnings forward ratio, compared with Facebook, which has a 55.45 P/E multiple.

Second only to technology, the energy sector of the S&P 500 has beaten analysts’ earnings expectations in 73 percent of the results reported so far. The focus will stay on the group this week, with results from Exxon, Chevron and Valero.

As a cyclical sector tied to the pace of economic growth, “better earnings and especially better guidance ... are going to say good things about the economy going forward,” said Tom Schrader, managing director of U.S. trading at Stifel Nicolaus Capital Markets, who focuses on energy stocks.

Reuters

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