Preparing for "Super Earnings Tuesday"

This Tuesday, 22nd July, the market will be waiting for 38 US companies to report earnings. This is the peak of earnings season and the outcome could be crucial for the direction of US stock markets over the coming weeks and months.

To give you a flavour of the companies reporting, they include:

• Coca- Cola (before market open)

• Harley-Davidson (before market open)

• Kimberly-Clark (before market open)

• McDonald’s (before market open)

• State Street (before the market open)

• Verizon Communications (1130 BST/ 0630 ET)

• Comcast (1330 BST/ 0830 ET)

• Omnicom Group (1330 BST/ 0830 ET)

• Apple (After the market close)

• Microsoft (After the market close)

We think that a few companies are worth watching closely in the next 24 hours:

McDonald’s: This is blue chip company, so its fortunes can have a material impact on market sentiment. It is also considered a gauge of Middle America’s consumer confidence. If its earnings miss estimates (the market is expecting EPS of $1.438) then it may suggest that the US consumer is sluggish.

Apple: This is the US’s largest company by market cap and so its fortunes are intimately linked to the overall US stock markets. After going through a rough patch in 2012, its shares have fought back and are now close to their highest ever level of $95.30 (adjusted for recent stock split). Tuesday’s results could be crucial to determine whether Apple engages on another leg higher, or if its shares start to pullback. Apple sales are also a good signal of global consumer demand; if they falter then we could see global market sentiment take a turn for the worst.

Microsoft: Like Apple, Microsoft’s fortunes are important for the overall market as it has the third largest market cap in the US. It is also a good indicator of consumer demand and business spending. Like Apple, investors can find comfort in a good set of Microsoft results, and panic if the company under-performs.

Verizon/ Comcast/ Omnicom: The communications and telecoms sector is also worth watching, as it has been driving a lot of M&A recently, which is one of the reasons for the stock market rally so far in 2014. Good results could drive this M&A boom further, whereas weak results could throw it into doubt and weigh on investor sentiment.

Q2 Earnings season so far:

Although it is early days, only 87 out of 500 companies listed on the S&P have announced earnings, the results have been positive so far. There have been positive sales and earnings surprises across all sectors, particularly the financials, healthcare and basic materials sectors. Sales growth has been particularly strong for health care, consumer services and oil and gas, while top-performing sectors on the earnings front include technology and basic materials. While it is too early to draw conclusions about the strength of the US corporate sector, the fact that earnings have been strong across a broad range of sectors is encouraging.

A few things to watch out for from this week’s earnings:

• Big positive or negative earnings surprises

• Sales growth

• Any dividend announcements.

The latter is particularly worth watching in regards to Apple and some of the larger companies, as the announcement of dividends can trigger a rally in the stock price.

The technical view:

US stock markets still look like they are in a strong uptrend even after the recent volatility caused by the uncertain geopolitical situation and a number of market watchers are expecting the index to reach 2,000 – 2,150 by the end of this year.

Although stocks are set to climb, the trajectory could be shallow, and the easy gains may have already passed us by. The mature phase of a bull run in stocks is always a treacherous time for investors, is a fresh record high a buy signal or is it time to take profits? This week’s earnings announcements could determine the next direction for US stock indices.

One tip, if you feel that stocks could be about to push higher, look for a bounce back above the prior high, in the S&P’s case this is 1,985 from 3rd July. If the S&P 500 does not make a fresh high on the back of Tuesday’s earnings bonanza then the bulls could be disappointed.