MarketView for January 25

Summary

Share prices gained some ground in a late flurry of buying to end little changed on Tuesday as overall optimism about earnings offset disappointing results from 3M and Johnson & Johnson. About 70 percent of S&P companies so far have exceeded consensus estimates, but worries over inflation cutting into profits have meant that only companies that only produce spectacular results see interest in the shares.

3M fell 2 percent to close at $88.50 after results barely topped estimates and the manufacturer warned rising raw material costs would pressure its bottom line. Meanwhile, the S&P 500 index bounced off support at 1,280 in a sign of the market's resilience despite some disappointing earnings.

Johnson & Johnson reported that sales of consumer products fell sharply and forecast 2011 earnings below expectations, sending its shares down 1.8 percent to $61.08. After the closing bell, Yahoo reported quarterly net revenue fell 4 percent and forecast a further decline this quarter, sending its shares down 3 percent to $15.54 in after-hours trading.

Trading volume was 7.97 billion shares on the three major exchanges, down from last year's approximation of 8.47 billion shares.

Not all blue chips disappointed investors. Verizon rose 1.6 percent to $35.79 after company said it added far more wireless subscribers than expected in the quarter. rose 1.1 percent to $56.23 after it posted a higher-than-expected earnings for the quarter.

With reports in from 22 percent of S&P 500 companies, earnings for the fourth quarter are now expected to have increased 34.9 percent from a year earlier, according to Thomson Reuters data.

Consumer Confidence Highest in Eight Months

The Conference Board reported on Tuesday that consumer confidence reached its highest level in eight months, underscoring what is becoming increasingly apparent and that is that the economy appears to be well into recovery mode, although the housing market continues to try and push us in the wrong direction.

According to the Conference Board’s report, its index of consumer sentiment hit 60.6 from 53.3 in December. The increase reflected gains in stock market prices and some labor market strength, which offset sustained drops in home values and high gasoline costs.

The report was in sync with other data pointing to an accelerating pace of economic resurgence.

Sentiment remained optimistic even though the closely watched Standard & Poor's/Case-Shiller survey also released on Tuesday showed that single-family home prices fell for a fifth straight month during November.

Although the decline, if sustained, would impact consumer sentiment, it would more than likely be offset by the improving labor market conditions. The report on consumer confidence came as Federal Reserve officials gathered for a two-day meeting at which they are expected to acknowledge the improving outlook, but will likely suggest their $600 billion bond-buying program designed to stimulate growth is fully on track.

The government is expected to report on Friday that the economy grew at a solid 3.5 percent annual rate in the fourth quarter of last year, driven mainly by robust consumer spending, after expanding at a 2.6 percent pace in the July-September period.

However, even as some sectors of the economy are showing a bit of strength, the S&P/Case-Shiller survey on the housing industry showed the housing industry remains a problem. The S&P/Case-Shiller composite index of 20 metropolitan areas declined 0.5 percent from October.

From November 2009, prices were down 1.6 percent. Despite a slight improvement in sales of previously owned homes last month, economists said prices would likely continue to slide given the number of unsold homes on the market. Sixteen of the 20 cities surveyed showed annual price falls in November, while 19 showed monthly drops.

Meanwhile, the Conference Board's expectations index climbed to its highest level since May, while the present situation index hit its highest level since November 2008. Even more encouraging, consumers' labor market assessment improved, with the "jobs hard to get" index declining. However, the consumer survey also had some worrying news. Consumers' expectations for inflation in the next 12 months rose to the highest since July 2009.

Commodities…A Force to be Reckoned With

The rising cost of commodities is emerging as the main threat to an earnings recovery that has helped push share prices to their highest levels since the 2008 financial crisis. A broad spectrum of industries, from blue-chip manufacturing companies like 3M and DuPont, to disposable products manufacturer Kimberly-Clark and fashion accessories house Coach, cited rising costs as a risk to growth this year.

To counter the higher prices they are paying for food and materials, companies such as McDonald's are looking to raise their own selling prices this year. That could be a risky proposition at a time when the economy's recovery is still in the embryonic stage and unemployment remains stubbornly high.

The pinch of higher costs has not been evident in fourth quarter results reported so far -- earnings growth has outpaced revenue growth, showing that margins have held up. However, the outlook for 2011 is a different matter.

DuPont, which reported quarterly profit of 50 cents per share, expressed concerns over how long it could continue to push through price hike as prices of commodities of all kinds have risen over the past year, driven by recovering demand in emerging economies. Oil futures this month reached $92.58 a barrel, their highest level since 2008, while copper hit a record high last week.

Beyond raising their selling prices, executives said they were looking for other ways to cut production costs. Coach said it would manufacture less in China as local wages rise, while Kimberly Clark said it would stop making its own pulp and cease offering some generic products that command lower margins.

3M saw its margins deteriorate at its healthcare supply and optical equipment unit, and plans to rein in capital spending early this year as it copes with higher commodity prices as well as rising pension expenses and a higher expected tax rate.

"We will spend cautiously in the early part of this year, to see where things go," said 3M Chief Executive George Buckley on a conference call discussing the company's fourth-quarter results.

Kimberly-Clark said it could close five or six factories, including locations in Everett, Washington and Australia, and seek out lower-cost manufacturing locations as a way to boost its profit.

Coach said it would move some purse and wallet production out of China after Beijing raised the minimum wage by 21 percent. The company is "feeling inflationary pressures," CEO Lew Frankfort said, noting that the cost of leather has also risen sharply, adding to last year's near doubling of the price of cotton -- another key raw material for the garment industry.

3M shares were down 2.4 percent to $88.12, DuPont was up 10 cents at $48.99, Kimberly-Clark was up 3.4 percent to $66.14 and Coach was down 1.3 percent to $52.62. All four trade on the New York Stock Exchange.