Wall Street has finally come to grips with the fact that the Federal Reserve is going to raise interest rates until inflation is well contained. Now investors will focus on whether those rate hikes are going to pressure corporate profits.
There's very little economic data in the week ahead, which is not necessarily a bad thing. In recent months, Wall Street has shown a tendency to overreact to economic reports, even when analysts say the numbers are insignificant or inconclusive. The Fed's month-long tough talk on inflation has coincided with a month-long selloff based on inflation fears.
Now, however, with the Fed all but certain to raise rates at its meeting at the end of this month, Wall Street's attention will turn to corporate earnings. This is "preannouncement" season, in which companies issue revised forecasts on their earnings. Preannouncements, which often aren't scheduled in advance, can be either good or bad, and can send a stock sharply higher or lower.
The key for the week will be in watching the preponderance of earnings forecasts. If they are generally positive, stocks could continue to rally. But if bellwether companies start to show weakness, and if they blame a slower economy for their troubles, stocks could resume their tumble.
Last week, Wall Street finally turned its back on weeks of steep losses as any uncertainties over the Fed's intentions were erased and stock prices became cheap enough for bargain hunters to reenter the market. For the week, the Dow rose 1.13 percent, while the S&P 500 slipped just 0.06 percent and the Nasdaq lost 0.24 percent.
On Tuesday, the Commerce Department reports the number of new homes started in May, as well as how many building permits were issued. Housing starts are expected to grow slightly to 1.86 million from 1.85 million in April; building permits are forecast to decline to 1.96 million from 1.97 million.
Investors will be anticipating the Labor Department's Wednesday update on weekly unemployment claims for signs of the job market's health. First-time applications slid by 8,000 to 295,000 last week, but economists still maintained expectations for a weakening job market in the coming months.
The Conference Board releases its index of leading indicators Thursday morning. Since the index is a compilation of previously reported economic figures, it usually does not impact the market. The index is projected to drop 0.4 percent after losing 0.1 percent in April.
Circuit City Stores Inc. posts its first-quarter earnings before the opening bell Monday. Analysts see the electronics retailer's profit at a penny per share, up from a loss of 7 cents the year before. The company's stock has nearly doubled from a 52-week low of $15.51 in September to finish at $29.48 Friday.
Kroger Co. releases its results Tuesday morning. The supermarket chain is expected to report earnings of 42 cents per share, up from 40 cents a year earlier. Its shares have seen erratic trading through much of 2006, but have nonetheless gained 7.3 percent from a February low of $18.27 to close at $19.61 on Friday.
Earnings from Oracle Corp. Thursday afternoon should provide clues about the health of the tech industry. Oracle's earnings are seen inching up to 27 cents per share from 26 cents last year. The software maker saw its stock surge to a two-year high of $14.93 in late April; shares have since fallen 4.9 percent, but closed Friday at $14.19 _ up 3.6 percent for the day after the company said it expects to beat analysts' expectations.