updated 10/23/2005 4:05:42 PM ET 2005-10-23T20:05:42

Some of the nation’s biggest, most successful companies have posted very good third-quarter earnings, yet their stocks have been punished for lackluster profit forecasts. And that has the major indexes whipsawing — a trend likely to continue in the week ahead.

Major Market Indices

Wall Street’s focus is always on the future and the potential for strong profits. The problem with earnings reports is that, no matter how good they are, they’re already well in the past. Corporate profit forecasts are far more important, especially amid economic uncertainty.

There’s plenty of economic uncertainty weighing on investors. Growing evidence suggests the economy has weathered high energy prices, and could continue to adapt through the winter. A drop in crude oil prices to the $60-per-barrel level was also a positive sign. Yet members of the Federal Reserve’s interest rate-setting committee spoke issued a barrage of inflation warnings last week, and intimated that the Fed won’t be done raising rates any time soon.

Worst-case fears
The mixed message has fueled fears of Wall Street’s worst-case scenario: The Fed continues raising interest rates, which might combat inflation, but also makes the capital needed for economic growth more expensive for both individuals and companies. With energy prices remaining well above their historic levels, consumers finally start cutting their spending. That squeezes profits at companies, which are already paying more for their own energy and material costs. And companies that might want to expand to bring in more revenue can’t afford it due to the higher interest rates.

Corporate profits shrink, making stocks less valuable. And when companies issue cautious profit forecasts when the Fed is all but promising more rate increases, those fears become more pronounced.

Wall Street’s worries resulted in a wildly uneven week, with the Dow Jones industrials jumping 128 points on Wednesday, only to drop 133 points on Thursday and finish the week mixed. For the week, the Dow fell 0.7 percent, the Standard & Poor’s 500 index lost 0.59 percent and the Nasdaq composite index rose 0.84 percent.

Commerce 3rd-quarter GDP report due
The health of the economy, and its resilience in the face of energy prices, will be assessed after the Commerce Department releases its first reading of the nation’s gross domestic product for the third quarter. Economists expect the economy to have grown at an annualized rate of 3.6 percent in the third quarter, up from 3.3 percent in the second quarter. Given the uncertainty over the economic impact of Hurricanes Katrina and Rita, this will be a closely watched indicator when it’s released Friday.

The Conference Board will release its October consumer confidence index Tuesday. Despite the stock market’s gyrations and high energy prices this month, the index is expected to come in at 88.3, up from 86.6 in August.

High season for earnings
Earnings season continues with hundreds of companies reporting in the week ahead, including Dow components American Express Co., Boeing Co., Merck & Co., Microsoft Corp. and Verizon Communications Inc.

Among other notable companies, Chevron Corp.’s stock has struggled over the past few weeks as oil prices retreated. Chevron is down nearly 15 percent from its 52-week high of $65.98 on Sept. 29, closing Friday at $56.30. Chevron is expected to earn $1.91 per share, compared to $1.15 per share a year ago, when it reports its third-quarter earnings Friday morning.

WellPoint Inc., the nation’s largest health insurer, is expected to earn $1.01 per share for the quarter, up from 83 cents per share in the third quarter of 2004. The company has active in acquiring smaller rivals, and has seen its share price more than double from a 52-week low of $36.26 on Oct. 22, 2004, closing Friday at $78 after setting a new 52-week high during the session.

While not a typical Wall Street “event,” Hurricane Wilma was expected to make landfall early Monday in Florida. The storm was not expected to cause substantial damage to oil-producing facilities in the Gulf of Mexico, but there certainly could be economic and market fallout from its wind and rain.

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