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msnbc.com
updated 3/14/2004 2:23:10 PM ET 2004-03-14T19:23:10

Stocks may come under pressure this week as edgy investors worry about the potential for more geopolitical shocks after last week’s deadly train bombing in Spain. But one catalyst for the market may be earnings pre-announcements season, which will start to warm up this week.

Major Market Indices

At the same time, investors are likely to exercise caution ahead of this Tuesday’s meeting of the U.S. Federal Reserve’s policy-setting committee, which is expected to be one of the week’s economic highlights.

Most market strategists expect the Fed’s Federal Open Market Committee (FOMC) to keep the key federal funds rate unchanged at a four-decade low and maintain its expectations for tame inflation. But investors will also be listening keenly for any shift in the Fed's economic outlook, particularly given the unexpectedly soft labor market report for February.

"What's really important is how the FOMC characterizes the labor market in their statement," said Jeff Kleintop, chief investment strategist at PNC Advisors. Any hint from the Fed that the jobs drought is more severe than currently thought could affect investors' interest-rate expectations, he said. Most investors are betting rates will stay low for at least the rest of the year.

“We’ve had two disappointing payroll numbers since the Fed’s last meeting in mid-January when the Fed said it saw improvement in the labor market,” said Steve Stanley, an economist at RBS Greenwich Capital. “The Fed can’t be complacent about that.”

Investors shouldn’t be complacent about the Fed meeting either, Stanley added.

The last few meetings have surprised the markets, including the Fed’s decision to alter its “considerable period” language — perceived as a pledge to keep interest rates low — in January, Stanley added. “The last time the Fed met we thought it would be a non-event,” he said. “We can’t go into 2:15 p.m. on Tuesday feeling totally relaxed.”

With stock prices up some 40 percent in strong stock rally over the past year, analysts say Wall Street has been in the midst of a full-blown market correction, with the broader stock market, as measured by the Standard & Poor’s 500-stock index dropping 4.4 percent from its 2004 high seen in mid-February.

Investors are pouring money into the safer haven of bonds and steady, “defensive” stock sectors, nervous that the nation’s economic recovery has yet to truly hit its stride.

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The sell-off was exacerbated last Thursday, when Wall Street’s major stock averages fell to their lowest levels of the year in the wake of renewed terrorism fears following a devastating train bombing in Madrid, which has left at least 200 people dead and hundreds more injured.

Spanish government officials initially blamed the attack on the Basque separatist group ETA, but the Dow Jones industrial average suffered its biggest one-day slide in 10 months on the suggestion late Thursday that the bombings could be the work of the terror group al-Qaeda. Spanish authorities said they arrested five people Saturday who are suspected to have ties to Islamic militants.

The government also announced finding a videotape in a trash can Saturday on which a man says the Islamic terror group was punishing Spain for its support of the Iraq war.

Stable stocks desired
“Investors want to be in companies that may not be very profitable, but are stable,” said Peter Dunay, chief market strategist at Wall Street Access, a New York-based retail brokerage. “This is a weird time for the market: We’re still getting stimulus and solid economic growth, but employment is low, so we have to worry about the future of the economic recovery.”

One key reason for the market’s weakness in recent weeks is the vacuum of corporate earnings news Dunay said. The fourth-quarter reporting period is almost over, and only a few companies have started to tell Wall Street if they will hit or miss their earnings targets for the first quarter of 2004.

Wall Street may derive some reassurance from companies’ earnings outlooks this week. Earnings pre-announcements season, as it is known, will peak during the last week of March and the first week of April, but an increasing number of firms are expected to make announcements about their first-quarter earnings prospects this week, and judging by recent estimates they could be good news for stocks.

Joseph Cooper, an analyst at earnings research firm Thomson/First Call, points out that every new quarter usually begins with very optimistic earnings forecasts, but those estimates are usually ratcheted down as the quarter progresses at a rate of about 1 percent a month. But with the first quarter nearly over, estimates have actually been rising, he said.

Earnings estimates for the Standard & Poor's 500-stock index started the quarter at 13.4 percent, but today those estimates are at 14.9 percent, a rise of 1.5 percent, Cooper said. “We’re going against the normal pattern of Wall Street revising its earnings estimates down -- they are going up instead,” he said. “It’s a trend that started in the third and fourth quarters of 2003, and we it’s continuing into this quarter.”

The reason: a dramatic increase in earnings estimates of the technology and energy sectors, said Cooper. “These are the areas where we’re seeing the bulk of the earnings revisions,” he said. “There’s still strength in the technology sector, in areas like software, despite the fact that stock valuations are absurdly high, and higher commodity prices are boosting profits for energy firms.”

The flow of fourth-quarter earnings reports remains at a trickle next week. In the financial sector, Bear Stearns and Morgan Stanley are both expected to issue their quarterly scorecards. Results are expected General Mills, FedEx and Nike.

On the economic front, data of note include a report on weekly jobless claims, as well as a couple of regional manufacturing surveys, data on industrial production and consumer-level inflation.

Worries that businesses are not growing enough to hire new workers have been nagging investors for months as the weak labor market heightens fears consumers may rein in the spending that buoyed U.S. growth through the recent economic downturn. Over a week ago the government said just 21,000 workers were added to company payrolls in February, another in a recent string of disappointing reports.

"More and more, you're going to be listening to company conference calls to find out whether they are hiring people or will be hiring people," said Henry Herrmann, chief investment officer at Waddell & Reed. "What's really in play now is whether or not the economic expansion is sustainable ... and an important part of the answer is jobs."

Fears that al-Qaeda has stepped up its campaign of global terrorism sent shockwaves through world financial markets last week.

Even after a hefty rebound in Friday’s session, the three major U.S. market gauges were off substantially for the week: The S&P 500 index sank 3.1 percent, the Dow Jones industrial average lost 3.4 percent and the Nasdaq Composite index fell 3.1 percent.

Reuters contributed to this report

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