Early earnings reports have underlined those concerns, which may be exacerbated when dozens of major companies – including Dow components General Electric, Microsoft and International Business Machines – report this week.
“Caution is definitely the operative word as Europe and China look to continue dragging on earnings,” said Michael Loewengart, director of investment strategy at E-Trade Financial in New York. “The overall tone is so pessimistic that we may see some upside surprises, but we could still suffer considerable losses if the news is bad.”
Profits of S&P 500 companies are seen dropping 3 per cent this quarter from a year ago, the first decline in three years. Corporate results are expected to have been hurt by China’s slowing growth and Europe’s debt crisis, which recently prompted the International Monetary Fund to cut its 2012 economic growth outlook.
Financial stocks will be especially in focus, with Bank of America, Citigroup, Goldman Sachs Group and Morgan Stanley all set to report.
Results on Friday from JPMorgan Chase and Wells Fargo generated some caution about the group despite both reporting record profits. Wells Fargo posted disappointing revenue and a bigger drop in net interest margin than had been anticipated.
Wells Fargo shares slumped 2.6 per cent to $34.25 while JPMorgan lost 1.1 per cent to $41.62 despite bullish commentary about the housing market.
“We need to see big banks doing well, and JPMorgan or Wells didn’t give us the boost we were hoping for,” said Wayne Kaufman, of John Thomas Financial in New York. “Citigroup is the one we’re looking for. If profits come in worse than expected there, that would make me more bearish about the economy in general.”