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By Vivian Chu
NEW YORK (Reuters) - Earnings will dictate the course of stocks next
week, as corporate America kicks off one of the busiest weeks in its
quarterly reporting season.
But after a stock market rally that began just over a year ago, companies
will have to deliver strong results in order to justify stock prices'
hefty gains.
At the same time, Wall Street will also keep a wary eye on the situation
in Iraq (news - web sites), where escalating violence has fueled investor
uncertainty and tempered positive sentiment.
The upshot will likely be a volatile week for stocks, as investors'
attention will be split between poring over earnings reports and watching
out for events unfolding overseas.
"Expectations are high, so the earnings reports out next week will
have to be just as strong," said John Caldwell, chief investment
strategist at McDonald Financial Group in Cleveland, Ohio, who said
he is expecting a "great" earnings season.
"They have to be strong to support the returns we had for stocks
over the last year, and they have to be very strong to support stocks
moving even higher," Caldwell added.
Roughly 70 companies in the Standard & Poor's 500 are scheduled
to report results next week. And though investors are anticipating a
bumper crop of earnings, rising tensions in the Middle East, particularly
Iraq, could eclipse any upbeat news on the corporate front, analysts
said.
"News from the Mideast will continue to push markets around, because
our continued involvement is expensive, and will impact the budget,"
said A.C. Moore, chief investment strategist at Dunvegan Associates,
Santa Barbara, California.
On Friday, U.S.-led troops battled Sunni and Shi'ite rebels, while at
least 13 foreigners were reported kidnapped in a week that saw the worst
fighting since U.S. forces ousted Saddam Hussein (news - web sites)
a year ago. Seven South Koreans were later released.
Many investors fear that a longer occupation in Iraq could contribute
to already huge U.S. budget deficits, which could in turn drive up interest
rates.
And while companies may issue upbeat forecasts, "markets may shrug
it off in view of negative money flows and a seemingly bogged down situation
in Iraq," Moore said.
INTEL, McDONALD'S ON EARNINGS MENU
Dow components due to post earnings next week are Intel Corp. (NasdaqNM:INTC
- news), Johnson & Johnson Inc. (NYSE:JNJ - news), McDonald's Corp.
(NYSE:MCD - news), International Business Machines Corp. (NYSE:IBM -
news) and Citigroup Inc. (NYSE:C - news).
Other heavyweights reporting results include Merrill Lynch & Co.
Inc. (NYSE:MER - news), Texas Instruments Inc. (NYSE:TXN - news), and
PepsiCo Inc. (NYSE:PEP - news).
For the first quarter, analysts have pegged earnings growth over last
year of 17 percent, according to market research firm Thomson First
Call. Though that is slightly below the previous quarter's sizzling
28 percent growth rate, it's still relatively strong.
On Friday, the Dow Jones industrial average (^DJI - news) ended a seesaw
session down 38.12 points, or 0.36 percent, at 10,442.03. The Standard
& Poor's 500 Index (^SPX - news) closed down 1.21 points, or 0.11
percent, at 1,139.32. The technology-focused Nasdaq Composite Index
(^IXIC - news) rose 2.64 points, or 0.13 percent, to 2,052.88, based
on the latest figures.
For the week, the Dow fell 0.3 percent, while the S&P 500 and Nasdaq
each shed about 0.2 percent. Each of the major indexes rose last week.
TAKING THE ECONOMY'S TEMPERATURE
Though earnings will take center stage next week, investors will also
receive a batch of economic data, for more clues about the strength
and staying power of the economic recovery.
On Monday, the Federal Reserve (news - web sites) Bank of Chicago will
release its Midwest Manufacturing Index for February. On Tuesday, the
government will issue reports on March retail sales and February business
inventories.
Later in the week, investors will also look out for figures on weekly
jobless claims, housing starts, March industrial production, and the
University of Michigan's consumer sentiment index. Analysts have pegged
an increase in the closely watched consumer sentiment gauge to 96.5
for April -- up from a final March reading of 95.8.
(Wall St Week Ahead appears weekly. Comments or questions on this column
can be e-mailed to: Vivian.Chu(at)Reuters.com)
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