The assumption is that the earnings for the first quarter from most companies in the S&P 500 will be atrocious. That can be set side-by-side with the fact that the market now appears to be looking for news that is bad, but not as bad as expected. Currently stocks are being driven higher by the sentiment that “troubling, but not disastrous” is good.

Earnings from five companies are likely to set the tone for the market’s direction over the next two months. That is based on their size within the sectors that they represent, or when they report in the earnings cycle.

The market already expects Wal-Mart (WMT) to have a good quarter, so its earnings can be thrown out of the mix. But, those of its rival, Target (TGT) can’t. If Target’s same-store sales for the first quarter and its forecasts for the balance of the year are even modestly better-than-expected, the assumption will begin to emerge that the retail sector will not be slaughtered this year and that the 2009 holidays may not be as bad as last year.

Citigroup (C) is still widely considered that worst off of the large American banks. If its losses are considerable and they are due to further write-downs in toxic assets and consumer credit loans, the financial services stocks may sell off after many stocks in the group have more than doubled. Citi’s CEO said the bank made money in the first two months of the year. If it took a huge hit in the third, the Spring may be as painful for the sector as last Fall was.

Microsoft (MSFT) still has a broader exposure to the tech industry than any other single company in the world because of its presence on the PC, servers,  handsets, and in business applications. The firm has already guided that this year will be disappointing. If one or more of its lines of software business gained some ground over the last quarter, it may be a sign that PC, server, or IT spending is not dead. The ripple effect would lift a number of large cap hardware and software stocks.

Google (GOOG) is not just a proxy for online spending. Because its advertising platform is used by hundreds of thousand of companies, it is a nearly perfect proxy for whether companies across the world have cut their marketing budgets to the bone or whether some have decided to make ongoing but modest investments in trying to get new customers. If Google’s revenues are flat or down, stocks from media to consumer products companies could and should sell of.

Dow Chemical (DOW) represents a broad spectrum of markets because of its tremendous use of a wide variety of commodities and the fact that it sells products to scores of industries that need its basic chemical products to run their companies. Dow’s numbers will show whether it is able to pass its costs of basic materials on to customers. If not and its margins are compressed the resistance to spending on the most fundamental building blocks of industrial growth will be perceived as crippled. If Dow’s revenues are below expectations, industrial activity is probably moribund.

Douglas A. McIntyre

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.