NEW YORK -- Aluminum giant Alcoa gets a lot of ink for kicking off earnings season each quarter and setting the tone for the stock market. But it is actually IBM's results -- and its stock's reaction -- that determine the short-term direction of the broader stock market.
So even though Internet darling Google and software titan Microsoft report first-quarter earnings after the market closes today, it will be Big Blue's results after the bell that will either reinvigorate the bulls or embolden the bears on Wall Street.
The past 10 years, there has been a clear relationship between how IBM's stock reacts on the first trading day after it reports earnings and how the stock market trades the following five weeks, according to Bespoke Investment Group.
In short, the market reacts bullishly when IBM stock rises after the company reports earnings. And the market slumps when shares of the computer services company and American icon decline after its profit announcement.
Indeed, when IBM rallies after reporting earnings, the broad stock market, measured by the Standard & Poor's 500 index, has been up 81% of the time five weeks later, says Bespoke. The average gain: 1.24%.
But when shares fell, the market was down 70% of the time five weeks later, with an average decline of 3.02%
What explains the correlation between IBM and the S&P 500?
"Part of the explanation," says Bespoke co-founder Paul Hickey, "lies in the fact that IBM generates more than half of its revenues from its services unit, which has a presence in practically every S&P 500 company."
As a result, Hickey says, "any weakness in the performance of corporate America will likely show up in the results of IBM."