Stock markets likely in for further losses amid lowered earnings expectations

The TSX fell 63 points or 0.5% last week, its sixth straight weekly loss as the market moved further away from its most recent highs around the 12,700 level at the beginning of March.

At that point, the market had rallied more than 13% from the lows of early October as the European debt crisis showed signs of stabilizing, thanks in large part to two moves by the European Central Bank to provide cheap loans to eurozone banks.

Also, economic data showed further evidence that the U.S. economic recovery is self-sustaining.

But gains have been hard to find this past month and a half amid lowered expectations for corporate earnings and further indications that China’s economy, the world’s second-largest, continues to slow.

Indexes fell sharply Friday after China said its growth rate declined to 8.1% in the three months ended in March, down from the previous quarter’s 8.9%. The growth was the weakest since the second quarter of 2009.

Markets had rallied mid-week after U.S. resource giant Alcoa Inc. delivered a surprise profit to investors, and provided a positive outlook on aluminum prices.

But analysts doubt very much that Alcoa’s performance heralds a run of earnings reports that will be stronger than thought.

“The pace of improvement in the stock market since the fall has been driven by continued fairly strong growth rate in profit and that growth rate in profit is fading or has faded,” said Andrew Pyle, investment adviser with ScotiaMcLeod in Peterborough, Ont.

Analysts say that S&P 500 earnings are expected to rise little more than three per cent year-over-year during the first quarter. That is down sharply from 9.2% growth for last year and would be the slowest quarter for growth since the third quarter of 2009.

Major U.S. corporations handing in earnings this week include Citigroup and toymaker Mattel on Monday, Intel and Coca-Cola Tuesday, Bank of America and Advanced Micro Devices Thursday and McDonald’s on Friday.

Pyle said it’s tough to see what would be the catalyst for getting the TSX back on a positive track.

“To get that next leg up is going to require some pretty significant positive stories,” he said.

“You already had positive growth in the equity valuations that continued into this year and now profit numbers are not going to be the driver that they have been, arguably for the past three years.”

Also working against the resource-heavy TSX are sliding commodity prices.

Oil is well off its highs of around US$109 in mid-February, drifting last week to the US$103 level. And copper, widely viewed as a proxy for the global economy because it is used in so many industries, has fallen almost eight per cent since the beginning of April. Soft Chinese data has contributed much to the slide as the country is the world’s biggest consumer of the metal.

In Canada, traders will focus on the Bank of Canada Tuesday as it makes its next announcement on interest rates.

The central bank is widely expected to continue to leave the key rate unchanged but analysts think it’s possible the bank could adopt a more hawkish tone, signalling it is prepared to start raising rates down the road.

And it comes down to a very subtle change in wording in the statement.

“They may return to the comment that at some point, the current high stimulative conditions will need to be withdrawn,” said RBC assistant chief economist Paul Ferley.

But even that change in wording could be a stretch for the Bank of Canada.

Ferley expects “that the Bank of Canada will cite the persistence of external headwinds, though somewhat diminished, will remain potent enough to warrant monetary conditions remaining highly accommodative.”

Investors will also focus on a raft of important U.S. economic data during the week.

“We get a ton of U.S. fundamentals from manufacturing to retail to housing,” said Pyle.

“You name it, next week is probably the key week or the heaviest week in terms of the volume of information that will come out on the economy.”

The data will also set the stage for the Federal Reserve’s next meeting on interest rates, which will be held April 25.