US equity investors extended the S&P 500’s winning streak to six successive days and the benchmark closed at its highest level in a year amid general optimism about earnings.
Energy stocks led the market higher as crude oil prices rallied, while a number of brokerage upgrades infused bullish sentiment.
However, the market’s early gains were pared and during afternoon trade, the Nasdaq Composite and the Dow Jones Industrial Average both entered negative territory.
Amid light-holiday thinned trade, the S&P 500 closed up 0.4 per cent at 1,076.19 points, marking its longest run of daily gains since a six-day rally in late May and early June 2007. Meanwhile, the Nasdaq slipped a faraction lower to 2,139.14. The Dow closed 0.2 per cent higher at 9,885.80 and touched a new intra-day high for the year.
Among stocks in the spotlight, Black & Decker jumped 7.6 per cent to $50.82 after the company raised its third-quarter outlook, thanks to better sales and a weaker dollar. Barclays began coverage of the company with an Overweight rating and a price target of $55.
In deal activity, Onyx Pharmaceuticals, agreed to buy Proteolix, a private company, for up to $810m. Shares in Onyx rose 5.1 per cent to $28.26.
The third quarter earnings season starts in earnest this week and leading companies due with results include Intel and Johnson & Johnson on Tuesday; JPMorgan on Wednesday; while on Thursday, Goldman Sachs, Google, Merck, IBM, Citi, and Advanced Micro Devices report. The week is rounded off with earnings from Bank of America, General Electric, Halliburton and Mattel.
ThomsonReuters estimates the earnings growth rate for S&P 500 companies for the third quarter at minus 24.6 per cent. The estimated rate has been revised lower from 2.6 per cent at the start of the year, then minus 17.2 per cent at the beginning of April, and minus 20.9 per cent at the start of July.
“The Financials sector (+58 per cent) is anticipating the highest earnings growth rate for the quarter, while the materials (-65 per cent), energy (-65 per cent), and industrials (-45 per cent) sectors are expecting the lowest,” say analysts at ThomsonReuters.
While a negative quarter would extend Corporate America’s current run to nine consecutive quarterly profit declines, much attention will focus on an expected rebound in earnings next year.
As a result, guidance from companies looms as being the key driver of sentiment for equities.
“The most critical news is likely to be centred on initial guidance to next year’s business activity and its impact on the bottom line,” says Tobias Levkovich, chief US equity strategist at Citigroup.
“With Street consensus bottom-up earnings growth projected to climb 26 per cent to 27 per cent year over year in 2010, there is not that much room for conservative outlook statements which may be deemed disappointing,” said Mr Levkovich.
ThomsonReuters estimates earnings growth rates for the S&P 500 of 192 per cent for the fourth quarter, which benefits from an easy comparison with the fourth quarter of 2008. That is followed by a 34 per cent rise in earnings for the first quarter of 2010.
The positive start for equities on Monday was also a function of various brokerage upgrades.
Shares in MasterCard rose 0.7 per cent to $216, and Visa gained 1 per cent to $73.70, after they were upgraded from “neutral” to “outperform” by Credit Suisse. The bank’s price target for MasterCard was raised from $210 to $255, while Visa was increased from $70 to $84.
“An improvement in spending volumes should translate into improving revenue growth in the coming quarters which will increase investor confidence in a higher long term earnings growth rate,” said the bank. “Moreover, the secular shift from cash to plastic continues.”
Over at UBS, shares in Advanced Micro Deviceswere raised from “neutral” to “buy” and th chipmaker closed up 0.4 per cent at $29.85.
UBS also upgraded Amgen to a “buy” from a “neutral” rating. The stock rose 0.2 per cent to $59.51. Shares in Infosys dropped 0.8 per cent to $47.37 and pared an early rise after Wells Fargo upgraded the company. Abercrombie & Fitch rallied 2.3 per cent to $35.63 after the retailer was upgraded to a “buy”, while Occidental Petroleum rose 1 per cent to $80.31, in spite of being reduced from “buy” to “hold” by Citigroup. The bank lowered the target price for Oxy from $82 to $74.
Meanwhile, KB Homes dropped 7.8 per cent to $15.17, after the home builder said the Securities and Exchange Commission was investigating possible accounting and disclosure issues.
Shares in Google were up 1.7 per cent at $525.02. The company announced that Arthur Levinson had resigned as a member of the its Board of Directors, effective immediately.