US investors pin hopes on key results season

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The US stock market is flirting with 10,000 points on the Dow Jones industrial average as traders gear up for a slew of quarterly earnings results from the world's largest companies, which could show concrete evidence of a recovery in the global economy.

The latest earnings season, which hits its stride over the next few days, is one of the most hotly anticipated in years. It provides a concentrated period where every major corporate chief executive reports back on the past three months and sets out the company's outlook for the rest of the year.

The American economy is believed to have stopped contracting in the third quarter after the longest recession since the Second World War, but investors will be able to tell in the coming days if a recovery is based on a resumption of revenue growth for major companies or whether improved earnings are being driven solely by deep cost cutting.

If the latter proves to be the case, the outlook for unemployment in the US is likely to remain grim. Traders, however, are betting on the former, and bidding stocks higher in anticipation. The Dow hit a mid-morning high of 9,928 yesterday – its best intra-day level in a year. US stocks first passed the 10,000-point mark in March 1999, but two recessions since then have crimped returns. The wider S&P 500 index is now 60 per cent above its March nadir.

Data from Thomson Reuters shows that analysts expect the fall in earnings at S&P 500 companies to have moderated slightly in the third quarter. The year-on-year drop is forecast at 24.8 per cent, compared with a 27.3 per cent decline in the second quarter.

Mike Lenhoff, the chief strategist at Brewin Dolphin, said the quality of earnings could be more promising, too. "Now that a recovery is in the formative stages of development, what equity markets will be looking for is not only an improvement in the top line but both an improvement and promising guidance in sectors most likely to be associated with an upswing in the cycle such as consumer discretionary, industrials, technology and, of course, financials, to name a few."

An important barometer of the technology industry, the silicon chip-maker Intel, reports its results today. It first signalled that it had seen a bottom in demand in August and raised its revenue guidance, sparking new hopes across a range of companies that use its chips. The falling value of the dollar has helped US manufacturers.

There will also be strong interest in the financial sector. The giant investment banks, such as Goldman Sachs, JPMorgan Chase and Morgan Stanley are all expected to show continuing bumper profits from their fixed-income trading desks, helped by weaker competition.

Goldman is on course for a profit twice the size of last year's. It has already put aside $11.4bn to pay bonuses this year, and that figure could double by January. Morgan Stanley, meanwhile, is expected to post its first profit after three consecutive quarters of losses.