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Earnings may blunt market's rally

Stocks are expected to come under some pressure this week, as corporate earnings reports for the fourth-quarter of 2003 begin to hit Wall Street’s trading desks in significant numbers.

Stocks are expected to come under some pressure this week, as corporate earnings reports for the fourth-quarter of 2003 begin to hit Wall Street’s trading desks in significant numbers.

Earnings reporting season doesn’t start in earnest for another week, but over the next seven days, some well-known firms like General Electric and a handful of high-tech bigwigs like Intel and Sun Microsystems will report their quarterly results. Most Wall Street observers are looking forward to a healthy hike in profits.

“We'll have some economic reports of note [this week], but the most important element will be earnings season, and it’s expected to be extremely good one,” said Larry Wachtel, market analyst at Prudential Securities. The challenge for investors in the week ahead, he added, is how the stock market might react to the good earnings news.

In previous quarters of 2003, when earnings results handily beat expectations, stock prices rallied as investors saw rising corporate profits as reinforcing expectations for an economic recovery. But that might not necessarily hold true this quarter, Wachtel said, as investors' expectations for a good earnings season may already be priced into the market.

“We’re 10 months into this bull run and we still haven’t seen a correction of more than 5 percent,” he said. “So the trend is friendly, the market is resilient and it’s not unreasonable to expect the market to continue to go up, but the question is can it absorb more profit taking and continue to rise? When all the good earnings reports come out, will the market simply shrug its shoulders and say, ‘So what’?”

“Everything has to be put in the context of the fact that this market is up $3 trillion and has risen for 10 months without going though a significant correction,” Wachtel added.

Other market strategists have voiced concern that the stock market’s rally may have become overextended. The Standard & Poor's 500-stock index, a widely followed measure of stock market performance, is up 44 percent from a six-year low seen on Oct. 9, 2002. The tech-rich Nasdaq Composite index has rallied 87 percent over the same period.

The market’s major stock gauges climbed again last week. The Nasdaq Composite racked up a fifth straight week of gains and rose to its highest level in two and a half years, while the S&P 500 index closed with a seventh-straight week of gains.

Peter Cardillo, chief strategist at Global Partners Securities, sees stock prices retreating as quarterly earnings season comes into view. “Increasing talk of valuations could trigger a 5 percent pull-back,” he wrote in a recent note to clients, adding that he still expects larger cap stocks to outperform, as the market’s rally “enters a more mature stage” this year.

Earnings are certainly expected to shine this quarter. A consensus of analysts polled by research firm Thomson/First Call expects companies in the Standard & Poor's 500-stock index, a broad market measure, to report profits climbed 22.3 percent in the fourth quarter from the same period a year before and following a 21.4 percent gain in the third quarter.

Joseph Cooper, a research analyst at Thomson, thinks the final earnings tally will be more like 26 percent.

“The last time we saw an earnings season as good as that was in the third quarter of 1993, when they grew by 30 percent,” Cooper said. Fourth-quarter earnings should hit an all-time high for 2003, capping a 17-percent rise for the year as a whole -- the best year for earnings since 1999, Cooper noted.

Along with results from semiconductor giant Intel, earnings reports are due this week from technology heavyweights Apple Computer, Juniper Networks and Sun Microsystems. Results are also expected from Internet media firm Yahoo! and health care company Abbott Laboratories.

Financial services companies are also likely to be in focus, with quarterly scorecards due from Bank of America, Comerica, FleetBoston Financial and Wachovia, among others.

Earnings season is likely to overshadow most every other market event, including the unrelenting decline of the U.S. dollar, which hit a fresh record low against the euro on Friday. While a softer dollar makes U.S. exports more competitive overseas, it also bites into the value of dollar-denominated assets, prompting worries that foreign investors will return to their own markets.

On the economic front this week, the health of U.S. retailers over the all-important holiday shopping period is likely to command the most attention on Wall Street according to Steve Stanley, an economist at investment banking firm RBS Greenwich Capital. Consumer spending drives two-thirds of U.S. economic growth.

Retail sales data for the month of December are due for release before the stock market opens early Thursday, Stanley said, and the data are likely to be strong. “December is the most important month of the year for the retailers and I think number we’ll see will be good, judging from the strong U.S. auto sales data we saw [last week],” he said.

Other data on tap this week include two regional manufacturing surveys: The Empire State Manufacturing Survey and the Federal Reserve Bank of Philadelphia's manufacturing business outlook survey -- both are due out on Thursday. And reports on consumer and producer price indexes will offer the government's latest inflation estimates and clues about how long the Federal Reserve will keep interest rates a record lows.

Reports on business inventories, industrial production and consumer sentiment are also due for release this week, but the debate on Wall Street will likely center on Friday’s dismal jobs report, which showed U.S. employers took on very few new workers in December, indicating the economic recovery has yet to translate into sustained jobs growth.

“There’s a big discrepancy between the payrolls data and every other piece of data we’ve seen over last few months,” Stanley said. “I’m inclined to say this report is quirky and write it off, but if it’s weak again in January we’ll have to go back to the drawing board.”

Reuters contributed to this report.