Street Brushes Off French Downgrade, Feeble Bank Earnings, For Now

The S&P 500 could not hold the 1,300 level Tuesday, but given the recent eurozone downgrades from S&P and a soft earnings season from big U.S. banks the fact that stocks rallied at all was something of a surprise.

In what may be a sign that the year-to-date rally lacks conviction, the 10-year Treasury has hardly sold off with a yield still sitting well below 2% at 1.86%. That despite an advance in the major equity averages that saw the S&P pick up another 5 points to close at 1,294 Tuesday.

The continuing advance comes in the face of a slew of eurozone downgrades Friday, including the loss of France�s AAA rating, and weak results from U.S. banks like JPMorgan Chase and Citigroup, which booked fourth-quarter earnings that fell 23% and 11% from a year ago, respectively. Wells Fargo had a better report, with profits up 20.5%, but expectations are muted for the next reports out of the chute, including Goldman Sachs Group Wednesday.

To Seth Setrakian, co-head of equities at First New York Securities, the seasonal trends that typically boost the market in January are running out of steam and weak financial earnings could be the early drumbeat of a coming retreat.

�Stocks are cheap if you believe the �E�,� Setrakian says, referring to the earnings denominator of the price-to-earnings ratio. The problem comes if earnings growth, already expected to be weaker than in recent quarters, falls short of expectations. �Complacency is very high,� he warns and when people are dabbling for quick moves in speculative stocks it can be a signal that there is not enough healthy fear in the market.

One example: Sears Holdings. The retailer�s shares, hit hard since the news in late December that it will close more than 100 stores, shot up 9.5% Tuesday on speculation over a possible buyout. �It�s people taking a shot,� Setrakian says, �if something was happening you�d buy the bonds,� which were little changed.

On the topic of European downgrades, government officials got out ahead of the S&P downgrade of France and others Friday � a �brilliant� move in Setrakian�s view � making the cut seem like a non-event when it actually came through. Europe�s problems are still far from fixed though, and while the downgrades may have had little market impact initially they may complicate bailout efforts and give still AAA-rated Germany even more bargaining power to demand stiff austerity measures in return for any additional funding to peripheral countries.