Market Preview: So Far, So Good

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NEW YORK (TheStreet) -- Judging by the political rhetoric that's just starting to ramp up ahead of November's presidential election, everyone seems to be in agreement that the middle class is still worried about the economy.

Turns out, Mom and Pop Main Street aren't alone. Corporate America is getting jittery as well, according to UBS, which points to a drop in buybacks to $55 billion in the second quarter from $95 billion in the first quarter and a slowdown in M&A activity as two signs that companies are embracing balance sheet conservatism at the moment. The firm is expecting to see more evidence of the trend as second-quarter reporting season heats up.

"Throughout the recovery, U.S. companies have cut expenses, hoarded cash, and deleveraged balance sheets. Given continued uncertainty on the macro front, we believe that CEOs and CFOs will remain conservative, resulting in upward pressure on margins, continued balance sheet strength, and less cash being returned to shareholders," wrote strategist Jonathan Golub in commentary on Monday. "Further, below-trend reinvestment rates should provide a headwind for longer-term growth. This cautious mindset is also consistent with our call for modest 2Q earnings beats accompanied by tepid guidance"

UBS notes 2012 is on pace for a total of 137 deals worth $1 billion-plus, based on a current run rate of 67 transactions as of June 28. That's down from 147 in 2011 and 164 in 2010. According to the firm's data, S&P 500 companies, excluding the financials, had roughly 11% of their total assets in cash as of the end of the first quarter, a level that is near record highs.

Operating under the "cash is king" doctrine does have its benefits, said UBS, which doesn't expect the situation to change in the near term, given the stall in domestic job growth, Europe's recession/debt crisis/political quagmire and the mounting nervousness about Asia.

"On the positive side, the reluctance to deploy capital and increase expenses has led to rising corporate profitability, with operating margins still above prior peaks," Golub wrote. "Given global growth concerns and elevated macro uncertainties, we see no reason for corporate management to loosen the purse strings anytime soon."

While companies turning parsimonious isn't in and of itself a terrible sign for the stock market, it's also not encouraging for those expecting the United States to pick up the rest of the world's slack in terms of economic growth. After all, if corporations are reluctant to buy their own stock or make a play for their competitors, why should retail investors add to their equity exposure?

As for Wednesday's scheduled news, Dow components Bank of America and American Express are reporting their quarterly results.

It's basically been so far, so good with the big banks as Citigroup , JPMorgan Chase and Wells Fargo have all reported decent numbers so there's some pressure on B of A to keep pace.

The average estimate of analysts polled by Thomson Reuters is calling for the Charlotte, N.C.-based banking behemoth to report a profit of 14 cents a share in the June-ended period on revenue of $22.87 billion. The sell side is still skeptical, despite the stock's 40%-plus year-to-date gain, with 22 of 32 analysts covering B of A shares at either hold (19), hold (2) or sell (1). Guggenheim, however, is bullish with a buy rating and it says the performance of the competition bodes well for Brian Moynihan & Co.

"Implications for Bank of America's second quarter earnings are favorable given JPM's stronger than expected core brokerage, investment banking, and mortgage results," the firm said. "We already anticipated a penny beat by BAC, but if management can generate further efficiency gains while holding net interest margin relatively flat, this quarter's results could significantly outperform market consensus."

The heavily traded stock closed Tuesday at $7.92, implying potential upside of nearly 14% from Wall Street's 12-month median price target of $9.

AmEx has also been one of the Dow's better performers this year. The stock closed Tuesday at $58.68, rising 24% so far in 2012, well ahead of the blue-chip index's 4.8% gain. The consensus is for the credit card issuer to earn $1.09 a share in the second quarter on revenue of $8.09 billion, up from year-ago earnings of $1.07 a share on revenue of $7.62 billion.

Guggenheim, which has a buy rating and a $67 price target on AmEx shares, noted in its earnings preview that the company has topped analyst expectations by 3 to 9 cents a share in seven of the past eight quarter but it thinks another issue aside from the bottom line will get most of the attention.

"We believe a primary focus will be on commentary surrounding the Visa and MasterCard Interchange Settlement and how AXP may respond to the appropriate surcharge language relative to AXP's current no surcharge policy," the firm said.

Companies set to report their quarterly results before the opening bell include A.O. Smith , Abbott Laboratories , Bank of New York , BlackRock , Check Point Software , Honeywell , Knight Capital , Northern Trust , PNC Financial , Popular , St. Jude Medical , U.S. Bancorp and W.W. Grainger .

Late reporters include eBay , F5 Networks , Greenhill & Co. , Kinder Morgan , Noble Drilling , Qualcomm , Sallie Mae , Select Comfort , Stryker and Yum! Brands .

Aside from day two of Federal Reserve Chairman Ben Bernanke's testimony before Congress, Wednesday's economic calendar includes the Mortgage Bankers Association's weekly mortgage application activity index at 7 a.m. ET; housing starts and building permits for June at 8:30 a.m. ET; weekly crude inventories at 10:30 a.m. ET; and the release of the Fed's latest Beige Book report on economic conditions in June at 2 p.m. ET.

And finally, Wall Street wasn't quite sure what to do with Intel after its quarterly report following Tuesday's closing bell. Shares of the world's biggest semiconductor company were down less 1% in late trades after the Dow component delivered an above-consensus profit for the second quarter but brought down revenue expectations for the full year.

"As we enter the third quarter, our growth will be slower than we anticipated due to a more challenging macroeconomic environment," said Paul Otellini, the company's president and CEO, in a press release. "With a rich mix of Ultrabook and Intel-based tablet and phone introductions in the second half, combined with the long-term investments we're making in our product and manufacturing areas, we are well positioned for this year and beyond."

The stock was last quoted at $25.19, down 19 cents, on volume of nearly 6 million, according to Nasdaq.com.

Yahoo! was in a similar boat. The shares were barely moving late after the company offered up mixed quarterly results, topping earnings expectations but coming in a bit shy on revenue. New CEO Marissa Mayer apparently wasn't on the conference call with the company reportedly saying it's giving her time to get "acclimated."

--Written by Michael Baron in New York.

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