updated 3/13/2005 2:07:57 PM ET 2005-03-13T19:07:57

The stock market’s obsession with inflation could intensify in the week ahead as Wall Street’s major brokerage houses start reporting their first-quarter earnings.

Major Market Indices

Earnings in the financial sector typically come under pressure in a rising interest rate environment. When inflation is a concern, the Federal Reserve is particularly aggressive in raising rates to combat rising prices. The Fed has raised the short-term benchmark rate from 1 percent to 2.5 percent since last summer.

That tightens the availability of capital, making it more expensive, and that hurts brokerages’ bottom lines as the margins on their own borrowing shrink and the value of their rate-sensitive holdings, like bonds, decreases.

Investors will look to earnings from the Goldman Sachs Group Inc., Morgan Stanley and the Bear Stearns Cos. Inc. this week for signs that the Fed’s rate hikes are working, and also that the brokerages are adjusting their business plans to make up for the shortfalls.

Last week, a sharp climb in oil prices and a weaker dollar raised fears of inflation once again, sending the markets sharply off the 3½-year highs reached the previous week. The Dow Jones industrial average lost 1.52 percent for the week, while the Standard & Poor’s 500 index fell 1.4 percent and the Nasdaq composite index dropped 1.8 percent.

Data from Commerce, the Fed
The upcoming batch of economic data this week won’t do much to assuage inflation fears, but should give a clearer picture of the health of the economy. On Tuesday, the Commerce Department will release its retail sales report for February. Economists expect sales to improve by 0.6 percent for the month after a 0.3 percent drop in January. With sluggish auto sales removed, retail sales are expected to climb 0.8 percent, versus a 0.6 percent rise in January.

The Federal Reserve will release its industrial production figures Wednesday. The output of the nation’s factories is expected to rise 0.5 percent in February after a flat January.

Also Wednesday, the Commerce Department will report on housing starts and building permits for February. Both are expected to decline slightly from January due to seasonally poor weather conditions.

Bear Stearns, Morgan Stanley report
Bear Stearns will start the brokerage earnings reports before Wednesday’s trading session. The company is expected to earn $2.34 per share, compared with $2.37 a share a year ago. Bear Stearns’ stock has been a steady performer, rising 34.9 percent since closing at a 2004 low of $76.62 on May 10. It closed Friday at $103.33.

Morgan Stanley, which announces earnings Thursday morning, has climbed 25 percent from its low close of $46.80 on Aug. 6, ending Friday at $58.49. The brokerage is expected to earn $1.14 per share, up from last year’s $1.11 per share.

Also Thursday, Goldman Sachs will report its earnings and is expected to post a profit of $2.21 per share, down from the $2.50 per share a year ago. Like rival Morgan Stanley, Goldman Sachs has risen substantially since its August lows, climbing 30.9 percent from its close of $83.86 on Aug. 12 to close Friday at $109.55.

Among the other companies reporting this week is FedEx Corp., due out Thursday morning. The shipping company is expected to earn 98 cents per share for the quarter, up substantially from 71 cents a year ago. FedEx has been one of the market’s most solid performers the past two years, rising steadily from a close of $49.80 on March 14, 2003, to end Friday at $99.73, a two-year gain of 100.3 percent.

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