Stocks Brace for First Test in 2011

January 9, 2011 Updated: October 1, 2015

LOOKING FOR DIRECTION: Traders work on the floor of the New York Stock Exchange last week. U.S. stocks will look to the fourth-quarter earnings season, which begins this week, for direction on the U.S. economy.(Ramin Talaie/Getty Images)
LOOKING FOR DIRECTION: Traders work on the floor of the New York Stock Exchange last week. U.S. stocks will look to the fourth-quarter earnings season, which begins this week, for direction on the U.S. economy.(Ramin Talaie/Getty Images)
NEW YORK—After some strong gains to begin the year, stock market investors are bracing for their first test of 2011 as the fourth-quarter corporate earnings season kicks off Monday.

Fourth-quarter earnings from corporations will set the tone for the markets in the early going, and any signs of economic weaknesses may signal a stock market pull back.

Last week’s disappointing unemployment report stemmed some upward momentum, but the major indices still finished the first week of 2011 higher, with the Dow Jones Industrial Average up 0.8 percent, the S&P 500 Index up 1.1 percent, and the Nasdaq Composite Index up 1.9 percent.

Alcoa Inc., the nation’s biggest aluminum producer, is the first large company to report results, on Monday after market close. Alcoa, a Dow component and a major supplier to the construction and manufacturing industries, has seen its shares increase 25 percent since the beginning of December 2010.

Alcoa is expected to report 18 cents in earnings per share on Monday, on higher aluminum prices, according to the average of 14 analysts’ estimates surveyed by Bloomberg.

Analysts’ estimates compiled by Bloomberg show that earnings per share across all S&P 500 companies—the largest 500 public companies in the United States—rose around 22 percent last quarter.

The financial industry is expected to report strong results, according to Standard & Poor’s (S&P). Profit growth of 250 percent is expected for the financial sector. S&P expects the energy sector to see growth of 118 percent, and the consumer discretionary industry to grow by 63 percent on higher consumer spending. JPMorgan Chase & Co. will be the first large bank to report earnings, on Jan. 14.

Industries trailing the average are expected to include utilities (11 percent growth), telecommunications (7 percent growth), and health care (11 percent growth).

There are a few major economic reports to ponder this week. On Wednesday the Federal Reserve will release its Beige Book, which analyzes the U.S. economy by region. The following day, the Producer Price Index will give hints on the price of raw materials and other industrial commodities. This Friday, the Department of Commerce will release its monthly retail sales report detailing last month’s holiday shopping figures by sector.

Economists are cautiously optimistic going into the first earnings season of the year, especially given the recent market gains. And once again, growth will depend on employment.

“We probably need to see [weekly unemployment claims] fall below 400,000 and stay there to signal the economy is adding enough jobs to finally bring down the unemployment rate,” said Zacks Investment Research analyst Dirk Van Dijk in a report. “We are getting closer, but are not there yet.”