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U.S. stock investors look for earnings relief

NEW YORK (MarketWatch) -- After a week of fending off gloomy economic data, investors may get little respite next week as U.S. companies report earnings expected to bear the scars of a battered global market.

"Companies have actually done a remarkable job -- margins are at an all-time high, profit growth is in line with sales growth -- it's the macroeconomic factors that have been the real drag," said Ed Keon, managing director at Quantitative Management Associates, a subsidiary of Prudential Financial Inc. "Clearly anyone who has exposure to Europe will be struggling."

Second-quarter earnings for S&P 500 (SPX) companies are expected to rise 5.8% year-over-year. But excluding Bank of America Corp. (BAC) , whose results last year were hit by a mortgage lawsuit settlement, the index's earnings are forecast to rise a mere 0.7%, according to Thomson Reuters. The research firm also notes that the ratio for negative versus positive company guidance is at its worst since the end of 2008.

"[Consensus estimates] have been brought down to a point where even if the environment is difficult, it will be easier for companies to beat," said Bill Stone, chief investment strategist for PNC Asset Management. "But we still won't get the kind of blowout we had last quarter."

Alcoa, J.P. Morgan

Alcoa Inc. (AA) unofficially kicks off the reporting cycle late Monday. After having had its consensus estimate slashed almost 50% in the past month, the aluminum maker is now expected to post 5 cents of earnings per share, down from 32 cents last year. Alcoa has been the worst performer on the Dow Jones Industrial Average (DJIA) in the last year, losing 46%. Read Alcoa earnings preview.

The week builds up to a peak with the much-anticipated earnings announcement from J.P. Morgan Chase & Co. (JPM) on Friday, the first of the big banks to report. The embattled lender is expected to report profit of 76 cents a share, according to a survey by FactSet.

Of more interest may be the exact size of a trading loss from a complex derivatives strategy that went awry; the loss is expected to top $2 billion.

"The issue will also be how much in hedging losses they really made," added Stone, referring to the trading loss caused by J.P. Morgan's London unit.

That trading loss, which crushed J.P. Morgan's stock in May and tarnished its CEO's reputation, isn't the only controversy facing the bank. J.P. Morgan is one of several institutions under investigation for alleged rigging of the London interbank offered rate. Those charges led to a record $452 million fine for Barclays PLC(BARC) and the departure of the British bank's chief executive officer. Read more on fine.

Europe meeting Monday

Much of the attention, however, will remain in Europe, as euro-zone finance ministers gather on Monday to flesh out details of the crisis measures they agreed on at the European Union summit last month. On the table are pressing matters over how to use the rescue fund -- or the European Stability Mechanism -- to aid struggling members Spain and Cyprus; next steps for Greece; as well as when the European Central Bank-led single banking regulator might be formed.

"There's evidence that investors are willing to bid up market prices based on what's happening in Europe," said Keon. "Look at the rally we had from the summit – that was pretty substantial, and not because we got any new information, but just because investors saw some stability in Europe."

Global policy moves have been the main driver of stocks over the last few weeks.

China's surprise rate cut on Thursday, its second in a month, sparked worries that the world's second-largest economy may be priming investors for a slew of negative data next week. China is due to report inflation statistics on Monday and second-quarter gross-domestic-product growth on Friday, with expectations for the latter hovering around 7.6% growth year-over-year, according to Reuters. Read what to expect from China data.

Although relegated to the sidelines, U.S. economic data will also play a key role in how the markets move. U.S. stocks were hammered last week, aggravated by lighter-than-usual volume from the holiday-shortened week and by a slew of lackluster economic data.

The Dow Jones Industrial Average (DJIA) lost 0.8% for the week and the S&P 500 fell 0.6%; both indexes have fallen for two of the past three weeks. The Nasdaq Composite (COMP) , however, edged up 0.1%, its fifth-straight week of gains. Read more on U.S. stocks Friday.

Few hopes for more QE3

On Monday, the Federal Reserve issues consumer credit data for May, followed by the National Federation of Independent Businesses' small business index on Tuesday.

The diary gets busier Wednesday, as the Federal Reserve releases minutes from the last Federal Open Market Committee and trade deficit data is published. Analyst expectations on the Fed minutes, however, are muted.

"I don't expect anything significant from the minutes. We got exactly what we expected out of the last meeting -- the biggest thing being the extension of Operation Twist -- so now we need to let these policies take effect," said Phil Orlando, chief equity strategist at Federated Investors.

Meanwhile, the producer price index and consumer sentiment numbers are slated for Friday. "We're likely to see PPI numbers decline, and then that's likely to crack open the door a little bit more for QE3," said Stone of PNC, referring to a possible third round of quantitative easing from the Fed.

Broadly speaking, investors know what to expect from earnings even as Europe provides no clearer direction, analysts say.

"What's really driving equity investors at the moment is tail risk. Only if people get a sense that earnings are falling apart and the global economy is even worse than originally thought, then you might see further flight away from equities," said Stone, adding that "earnings will be weak, but they won't be disastrous."