MarketView for October 8

Summary

The major equity indexes slipped somewhat in light trading on Monday, pulling back from recent five-year highs ahead of an earnings season expected to be weak. Trading volume was the lowest so far this year in a full session as the government and the bond market were closed for the Columbus Day holiday. About 4.1 billion shares changed hands on the three major equity exchanges, as compared with the year-to-date daily average of 6.54 billion shares.

Stocks were pressured throughout the day as the World Bank cut its growth forecasts for the East Asia and Pacific region, and warned that the slowdown in China could worsen and last longer than many analysts expect.

Look for third-quarter earnings to fall for the first time in three years even though the S&P 500 gained 5.8 percent during that period. Such a grim forecast could call into question whether the rally can be sustained.

The reporting season begins in earnest on Tuesday with Dow component Alcoa, which is expected to post a break-even quarter compared with a profit of 15 cents per share a year earlier. Alcoa shares ended the day up 0.3 percent to close at $9.12.

Analysts forecast third-quarter earnings of S&P 500 companies will fall 2.3 percent from the year-ago quarter, according to the latest Reuters data. Earnings for the fourth quarter, which will be reported next year, are seen up 9.6 percent. However, some questioned whether the earnings bar was being set too low.

Further weighing on sentiment, euro-zone finance ministers said Spain did not need a bailout because it was taking steps to put its finances in order. Expectations that Madrid would ask for financial aid have helped support equities and other risky assets over the past several weeks.

Recent earnings warnings from large multinationals such as FedEx, Caterpillar and Hewlett-Packard have cited weakness in Europe and China. To make matters worse, according to Thomson Reuters data through Monday, 91 companies in the S&P 500 have issued negative outlooks versus 21 positive pre-announcements, for a ratio of 4.3, the weakest showing since the third quarter of 2001.

Netflix gained 10.5 percent to $73.52 after Morgan Stanley raised its rating to "overweight" on the stock of the video streaming company, saying that Netflix could become a global video platform.

Apple fell 2.2 percent to $638.17, ranking as the biggest drag on both the S&P 500 and the Nasdaq 100, despite denials of a strike at one of its manufacturing plants. China Labor Watch said a Foxconn plant in China that makes Apple's iPhone was crippled by a strike, but Foxconn, a Taiwanese company, denied the report.

UnitedHealth Group chalked up a gain of 0.8 percent to $57.60 on news that it will buy control of Amil Participacoes, Brazil's largest health insurer and hospital operator, for $4.9 billion, making a move into a fast-growing market as challenges mount for its domestic business.