Market rally could trip over bottom line

Its the earnings,stupid. Optimism that the fortunes of financial companies like Citigroup were improving sparked a four-week rally beginning March 10...

Its the earnings,stupid. Optimism that the fortunes of financial companies like Citigroup were improving sparked a four-week rally beginning March 10 that drove the Standard & Poor’s 500 index up 25 percent. But now investors will find out exactly how companies across all industries performed during the first three months of the year. Those quarterly results will determine whether the surge was the beginning of a bull market,or just a blip.

After all,the markets last promising rally was derailed not by jobs data or an emergency federal bailout but by forecasts from companies that make everything from computer chips to tin cans to movies.

The S&P 500 jumped 182 points,or 24 percent,to 934 between Nov. 20 and Jan. 6. The next day,technology bellwether Intel Corp.,aluminum producer Alcoa Inc. and media giant Time Warner Inc. all issu d grim earnings guidance. The S&P dropped 28 points,or 3 percent,that day and hasn’t returned to its early January levels since.

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The current rally also began with a company announcement. This time,beleaguered and bailed out Citigroup Inc. said March 10 it was profitable for the first two months of the year. The S&P 500 gained 43 points,or 6 percent,that day to 719. The index closed Thursday at 857,and markets were closed on Good Friday.

The S&P could rise more,and even turn positive for 2009,if earnings reports for the first quarter show a strengthening economy. Alcoa,the first big company to report their results each quarter,announced a loss of $497 million on Tuesday evening. But investors were pleased about the aluminum company’s efforts to cut expenses by $2 billion a year,and the shares are up 14 percent since.

“We’ve got this incredible possibility that the market has turned a corner that’s it’s not just a bear market rally or a head-fake,” said Arthur Hogan,chief market analyst at Jefferies & Co. “Earnings are going to let us know whether the market has gotten ahead of itself,or is justified in its new valuation of stocks.”

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