Stocks: One Step Forward, Two Steps Back

What goes down must go up? It sure seems that way.

REUTERS

After two days of losses, the S&P 500 has gained 0.5% to 1,972.83 today, while the Dow Jones Industrial Average rose 0.5% to 16,985.61 and the Nasdaq Composite jumped 0.6% to 4,419.03. The small-company Russell 2000, however, ticked up just 0.1% to 1,172.97.

The big news of the day: The minutes from the last Federal Reserve meeting. After initial dip, buyers stepped in and pushed stocks up towards a new high of the day. Citigroup’s Steven Englander explains why:

The Fed Minutes did not deliver anything new. In practice this is dovish as almost all market participants who expected a shift  from the Statement/Press conference were on the hawkish side. No one expected a more dovish message so the hawks are caught offside. However we are talking smalls here.

Of course, today was also the first trading day of earnings season, following Alcoa’s (AA) beat after the yesterday’s close. Mizuho’s Carmine Grigoli and Ujjal Basu Roy think earnings growth will accelerate during the second half of the year:

We are confident that earnings growth will accelerate over the balance of the year. Macroeconomic data suggest to us that analysts may be underestimating the level of prospective improvement in the second quarter. Our outlook calls for the S&P 500 to post a year-over-year gain of 7% in net income in the second quarter followed by 8% – 12% gains in the second half.

Goldman Sachs’ Amanda Sneider  and team explain which kinds of companies are most likely to beat earnings forecasts:

Companies where analysts revise down quarterly earnings estimates during the quarter are less likely to beat expectations than stocks with positive revisions or no change to estimates. Likewise, stocks with negative revisions are more likely to miss. Companies with negative revisions are rewarded more for beating expectations and penalized less for missing.

Companies that have had earnings revisions rise during the second quarter and are likely to beat earnings include Wyndham Worldwide (WYN), CBRE Group (CBG), Consol Energy (CNX), McKesson (MCK) and Boston Properties (BXP), Sneider says.