Market Preview: Profits Under Pressure
Updated from 5:39 p.m. ET to include additional commentary on the FOMC meeting, after-hours action.
NEW YORK ( TheStreet) -- Don't look now but the thesis that earnings are going to improve as the year wears on is starting to show some cracks.
According to Thomson Reuters data, the current blended analyst view is for profits from the S&P 500 to grow 9.8% in the second quarter, 6.2% in the third quarter, and 16.2% in the fourth quarter on a year-over-year basis.
But while the first quarter is shaping up pretty well, Tobias Levkovich, chief U.S. equity strategist at Citigroup, sees some clouds forming on the horizon.
"The austerity programs and credit conditions in Europe should mean a tougher second half economically, while the so-called US 'fiscal cliff' at year-end and Presidential elections in early November may cause management teams to defer some activity in 3Q12 until better
Levkovich also says corporate margin expansion is stalling, a significant obstacle for bulls expecting stocks to resume the near-constant upward trajectory they exhibited in the calendar first quarter.
"A renewed rally now appears unlikely when EPS estimates are uncertain," he said. "Given a more mixed sentiment signal and valuation backdrop, EPS trends become more crucial for equity price movement and it seems optimistic to buy into current forecasts. To be fair, investors are not pricing in powerful long-term earnings expansion and this protects the downside risk to equity indices, but banking on a big rally now requires a more aggressive posture."
Bank of America Merrill Lynch is more optimistic. It sees the potential for more downside in the S&P 500 from here but views this as normal trading behavior given how far the broad market has come in such a short amount of time.
"It is very typical for the equity market to correct part of a strong rally," the firm said early Tuesday. "The rule of thumb is one third to one half of the rally can be corrected. Measuring this off the October 2011 low to the April 2012 high on the S&P 500 would correct the S&P down toward 1300-1250. These levels fall right on the key supports that we have been targeting if 1340 (the March low) is breached. We believe the market is in a confirmed correction that will lead to a summer rally."
B of A is looking for the mega caps to provide some leadership, a thesis that looked prescient after Tuesday's session, which saw the Dow post the biggest gain.
Among the names the firm likes are Caterpillar(CAT) , Chevron(CVX) , Intel(INTC) , Eli Lilly (LLY) , Procter & Gamble (PG) , Kimberly-Clark(KMB) , Coca-Cola(KO) , United Parcel Service (UPS) , DuPont(DD) , and Verizon(VZ) , a group of stocks that it says have strong technicals and are under-owned by institutional investors.