Market Set for Heavyweight Action

GOOD MORNING. Stocks in Asia closed mixed today; U.S. futures are pointing to a higher open.

Stocks look headed for a higher open this morning and could be in for a wild ride over the next few days as some of the biggest market heavyweights report earnings this week. The markets got some good cheer from China today when a senior government official said the economy grew 7%-8% in the first nine months and should easily hit China’s target of 8% growth for the year; the news helped lift Chinese stocks 2.42%. The dollar, meanwhile, slipped broadly, and neared a 14-month low against the euro on expectations that U.S. interest rates would stay low well into next year. Dollar weakness has been a bullish sign for stocks this year, with the markets rising as the dollar has slumped. Among the big names reporting today: Boston Scientific (BSX), Eaton (ETN), Hasbro (HAS), Apple (AAPL) and Texas Instruments (TXN).

The big question now: whether those corporate earnings can keep the rally going. Stocks sold off Friday following weak reports from Bank of America (BAC) and General Electric (GE)—both reported steep losses from financial assets, suggesting that lending could remain constrained for some time. Still, most companies are doing a good job of beating expectations. Around 79% of the 61 companies in the S&P 500 have reported earnings for the quarter that have topped analysts' forecasts, while only 10% of companies have missed estimates, according to Thomson Reuters. Historically, 60% of companies beat third-quarter guidance, while 20% miss. And companies are running ahead of second-quarter performance. The markets need the big “heavyweight” names to keep beating expectations and giving solid guidance, says Stephen Pope, chief global strategist for Cantor Fitzgerald in London. Smaller U.S. stocks can ride on their coat-tails. And the rally should last as long as the Fed keeps interest rates and monetary policy “accommodative.”

Apple’s stock, in particular, is likely to see heavy trading today. Expectations have been running high that the tech darling will issue a blockbuster report and raise guidance for the fourth quarter when it reports earnings after the close. Analysts expect Apple to post a 13% increase in profits to $1.42 a share, well above the top end of Apple's own forecast of $1.18 to $1.23. And forecasts for the fourth quarter are for $1.91. But the rising stream of earnings may already be baked into the shares, which are up 93% for the year. Apple’s results have beaten Wall Street earnings estimates by an average of 21% over the past four quarters, according to analyst Doug Reid of Thomas Weisel. But given the stock’s “lofty expectations,” he sees prospects for a “slight pullback” after Apple reports. Apple is switching to a new method of accounting for iPhone sales that will allow it to book revenues when the sales occur rather than over the lifetime of the phone plan subscription. The new accounting should boost Apple’s earnings and lower the stock’s valuation, however many investors were already pricing those changes into their earnings models. Still, Reid recommends the shares on a pullback.

IN OTHER NEWS:

Apple’s (AAPL) last earnings release trumpeted their best non-holiday quarter ever, driven in part by a remarkable sixfold-plus growth in iPhone unit sales over the same quarter the previous year. Analysts aren’t anticipating quite such an eye-popping result this quarter, but the company is still expected to exceed the high end of its previous guidance. The consensus estimate of analysts calls for earnings of $1.42 a share for the fiscal fourth quarter. Analysts expect revenue of $9.2 billion.

The electronics and software company tends to give cautious guidance, and shouldn’t have trouble beating its own estimate of $1.18 to $1.23 per share. In recent months, Apple has gained some PC market share in the US, despite a pricey product. That’s due in part to the release this quarter of an updated version of its Leopard operating system--which should help drive notebook sales and boost margins--and a well-received new iPod Nano. The iPod is typically a strong holiday sellers, so that will be a focus for next quarter.

Looking ahead, continued domestic growth in iPhone sales will be more difficult, says Edward Zabitsky, Principal and CEO of ACI Research, a tech research outfit: “You’re really seeing the peak of the upgrade cycle” from 3G to 3GS. Apple’s agreement with AT&T (ATT) isn’t sustainable long-term, he says, because iPhone users create so much expensive traffic for AT&T’s network, and the end of exclusivity will eat into the company’s profit margins. Many analysts are focused on expansion into international markets, particularly China, as a driver for further growth in iPhone sales.