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updated 4/11/2004 1:59:37 PM ET 2004-04-11T17:59:37

Wall Street is expected to take its bearings from earnings this week, as corporate America lets loose one of the busiest weeks in its first-quarter reporting season. Most analysts expect a strong earnings season to buoy the market, but some caution that escalating violence in Iraq may steer stocks off course.

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About 70 companies in the Standard & Poor's 500-stock index and four members of the Dow Jones industrial average are due to hand in their profit scorecards for the first quarter this week, according to earnings research firm Thomson First Call. The list includes blue-chip names like Johnson & Johnson and Intel, which report Tuesday, and IBM and Citigroup, set to report Thursday.

While most Wall Street analysts expect a bumper crop of upbeat earnings, with companies in the S&P 500 index reporting profit growth of 17 percent for the quarter, rising tension in the Middle East, most particularly in Iraq, could eclipse any earnings euphoria, according to Peter Dunay, chief market strategist at New York brokerage Wall Street Access.

Dunay argues that a prolonged period of violence in Iraq will foster investors’ fears of a longer U.S. occupation, which will mean more U.S. money will be funneled to Iraq to fund the work, further enlarging the already huge U.S. budget deficits. This extra expense could in turn interrupt the U.S. economic recovery and drive up interest rates.

A prolonged U.S. presence in Iraq may lead to more acts of terrorism against the United States, he added, which could trample on consumer confidence.

“For the market, the question is how all the Iraq violence plays out over the next few weeks, and so the situation there is crucial for stocks and it might even be more important than earnings,” Dunay said. “If things start to calm down and we can get some sort of normality, earnings could become more important to the market again, but if the violence escalates, all bets are off and the economy could be in big trouble.”

Indeed, U.S. stock indices ended last week with a loss amid anxiety over the worst fighting in Iraq since U.S. forces ousted Saddam Hussein a year ago. Bloody turmoil reigned in Iraq again over the long Easter weekend, with Iraqi rebels fighting U.S.-led forces in several locations.

After a stock market rally that has driven the broader stock market up 42 percent and began just over a year ago as the war with Iraq began, analysts say corporate America will have to deliver strong earnings results in order to justify current stock prices.

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"Expectations are high, so the earnings reports out [this week] will have to be just as strong," said John Caldwell, chief investment strategist at McDonald Financial Group in Cleveland, Ohio. "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," he added.

General Electric, which reported modestly higher first-quarter earnings last Thursday, portends good things for the reporting period, noted Peter Dunay. The company, which saw earnings rise 8 percent in the first quarter, matching analysts' expectations, is a diversified conglomerate and a proxy for the performance of the overall economy, he said.

“GE has set us up well and suggests earnings should be pretty good,” Dunay said. “You’ll have some specific companies with problems, but in general this means the earnings picture will probably be as good as we expected, so the market should hold up well as long as the situation in Iraq doesn’t deteriorate.”

In addition to the four Dow industrial members reporting, earnings scorecards are expected from The New York Times Company on Monday, Merrill Lynch on Tuesday, Texas Instruments and Advanced Micro Devices on Wednesday, and Pepsi, Sun Microsystems, and E*Trade on Thursday and Friday.

Wall Street is also expecting a horde of economic data this week, which will provide clues about the strength and staying power of the current economic recovery. The list of expected reports includes two regional manufacturing reports: the April Empire State Manufacturing Survey and the Philadelphia Federal Reserve’s business conditions index. Both will give an early insight into the overall health of the U.S. manufacturing sector this month.

Also on tap this week: numbers on weekly jobless claims, March consumer prices, housing starts, March industrial production, February business inventories and the University of Michigan's consumer sentiment index, a closely watched consumer sentiment gauge that Scott Anderson, a senior economist at Wells Fargo bank, expects to rise to a reading of 97 for April, up from a final March reading of 95.8.

“I think the improved jobs picture is playing a big role in boosting consumers’ confidence, and the arrival of tax refund checks is helping things too,” he said. “But higher gasoline prices are likely to temper the enthusiasm somewhat,” he noted.

Anderson says he and his colleagues are monitoring consumer sentiment very closely, and for this reason he says the release of the government’s report on March retail sales, due on Tuesday morning, will be an important event for Wall Street.

“We’re looking out for any weakness in consumer because they represent two-thirds of economic growth, and so it’s critical to see the consumer hold up,” said Anderson. “We think the March retail sales number will show 0.6 percent growth. We’ve seen a lull in consumer confidence lately, but it doesn’t seem to have translated into lower sales.”

Reuters contributed to this report

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