Stock market bellwethers Intel Corp. (Nasdaq: INTC) and JPMorgan Chase & Co. (NYSE: JPM) gave earnings season a booster shot Friday when they released fourth-quarter results that exceeded analysts' expectations.
And even though the market reacted negatively to the news -- suffering its worst losses of the New Year -- their results add positive momentum to an earnings season that is expected to provide an abundance of good news.
For the first time since the second quarter of 2007, fourth quarter earnings of stocks in the Standard & Poor's 500 Index should be higher than they were the year before. That would break the longest losing streak since S&P began keeping track of operating earnings in 1991.
In fact, operating earnings for a group of companies selected by Thomson Reuters are expected to nearly triple on a year-to-year basis.
The optimism on Wall Street is based mostly on extremely unfavorable conditions in the fourth quarter of 2008, when financial companies lost $81 billion in the fourth quarter.
So what was behind the market swoon, which included shares of both Intel and JPMorgan?
It's possible that earnings revisions by Wall Street analysts raised expectations so high that investors were bound to come away disappointed.
Polls show that bullish sentiment among investors now exceeds 50%. That may be the result of an onslaught of positive revisions from analysts, who over the last four weeks have raised forecasts for 604 companies in the S&P 1500 and lowered forecasts for 389, according to Bespoke Investment Group. That means a net 14.3% of the index was upgraded in the last month.
In other words, the bar may have been set too high, and the results from JPMorgan and Intel, simply couldn't live up to the hype.
Despite the market's reaction, both companies' results were exceptional by most measures.
Intel's fourth-quarter profit surged by almost 10 times over last year's recession-depressed results, as revenue jumped 28%. And Intel's gross profit margin, the percentage of sales remaining after deducting the cost of production, hit 65%, an all-time record for the company. The closely watched measure will be about 61% for the year, Intel said.
"Gross margin is the metric, and boy oh boy, are they delivering there," Michael Shinnick, a fund manager at Wasatch Advisors Inc., which manages $7 billion in assets, including Intel shares, told Bloomberg News.
The world's largest chip-maker also surprised analysts by raising its guidance for the first quarter, issuing a sales forecast of $9.7 billion compared with a $9.34 billion average estimate of analysts polled by Bloomberg.
Other high-tech bellwethers will soon followIntel's report: International Business Machines Corp. (NYSE: IBM) will report on Jan.19, Google Inc (Nasdaq: GOOG) will weigh in on Jan. 21, and Microsoft Corp. (Nasdaq: MSFT) checks in on Jan. 28.
For its part, JPMorgan said its profits more than quadrupled on higher investment-banking revenue. But the second- largest U.S. bank lost money on consumer loans and increased capital reserves for future defaults.
The banking giant earned 74 cents per share, easily topping analysts' expectations of 61 cents a share. Total revenue fell below expectations, however.
"While we are seeing some stability in delinquencies, consumer credit costs remain high and weak employment and home prices persist," JPMorgan Chief Executive Officer Jamie Dimon said in the statement obtained by The Wall Street Journal. "Accordingly, we remain cautious."
Even though JPMorgan's results extended a winning streak for big U.S. banks, investors are also cautious as they look forward to earnings results from big financial firms in the next week.
Citigroup Inc. (NYSE: C) likely will report on Jan.19 that it lost over $5 billion after repaying part of the government bailout, while Bank of America Corp. (NYSE: BAC), will check in Jan. 20 with a $164 million profit according to a survey of analysts by Bloomberg. Goldman Sachs Group Inc. (NYSE: GS) is expected to report on Jan. 21 that it turned a profit after a loss last year.
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