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Earnings will guide Wall Street

With an absence of any significant economic news to guide it this holiday-shortened week, Wall Street will take its bearing from a flood of fourth-quarter earnings reports as earnings reporting season kicks into high gear after getting off to a solid start last week.

With an absence of any significant economic news to guide it this holiday-shortened week, Wall Street will take its bearings from a flood of fourth-quarter earnings reports as the reporting season kicks into high gear after getting off to a solid start last week.

(U.S. financial markets are closed Monday for Martin Luther King Jr. Day.)

In the week ahead, 110 companies in the Standard & Poor’s 500-stock index, a broad market measure, and nine of the 30 members of the Dow Jones industrial average, will release earnings results. The list of companies reporting includes household names like General Motors, Citigroup and Microsoft, which is a partner with NBC in MSNBC.

“It’s going to be a very busy week,” said Joseph Cooper, a research analyst at earnings research firm Thomson/First Call.

“The only sectors not featuring in the earnings parade this week are insurance and energy; all of the others will report in droves,” he said. “This is week you typically get the large names; the following week you’ll see a greater volume of firms reporting.”

Wall Street may get a boost from strength in overseas financial markets when U.S. trading resumes Tuesday morning.

Japan’s benchmark Nikkei average finished Monday at a three-month high and European shares closed at heights not seen in over 16 months, lifted by oil majors on a wave of higher crude prices and signs that technology companies such as Infineon can withstand the shock of a weaker dollar.

German chipmaker Infineon posted a second straight quarter of profits, thanks in part to an eight-percent gain in the euro versus the dollar over the quarter. Elsewhere, companies with a high proportion of earnings made in U.S. dollars also benefited as the currency continued its fight back against the euro, which hit a one-month low under $1.24.

Profit-taking anticipated
For the rest of the week, U.S. stocks will likely take their lead from the plethora of earnings reports expected to hit U.S. trading desks.

With only 66 companies having reported, earnings season has gotten off to a bright start. At the same time, most economic data continue to shine, suggesting the economy is strengthening.

But with the broader market up 42 percent in a 10-month rally, most stock market analysts are saying the durability of the advance depends on more economic growth and reassurance from corporations that higher profits are here for another year at least. Some are beginning to anticipate a market correction.

“We saw some selling into good news [last week], and as the bulk of earnings reports come out over the next few weeks I think we’ll see more of it,” said Peter Cardillo, chief strategist at Global Partners Securities. While Cardillo doesn’t expect a sustained decline, he expects to see a 5 percent correction in stock prices.

“It does seem like things are getting a bit frothy and I wouldn’t be surprised to see the market cool down,” concurred David Briggs, chief trader at Federated Investments, in a CNBC interview Friday.

“Earnings that are coming out now are validating the rally we have just had,” Briggs continued. “To move higher from here, we need companies to come out and say good things about future quarters. We’re running into resistance and we should at least stall a little here, or pull back a bit.”

Few analysts are predicting the stock market’s 10-week rally will fail and stocks will collapse. Investment strategists like Richard Cripps at Legg Mason argue that the market has more upside, as the earnings outlook is still good and the Dow and Nasdaq’s recent move above 10,000 and 2,000, respectively, has lured more investors into the market.

“The market has a lot of momentum from earnings continuing to rise and the economy improving and we have more room to go up from here,” Cripps told CNBC last Friday, adding that he thinks that in 2004 stocks in the Dow and the S&P 500 will outperform the current rally’s best-performing sectors, like technology and small-capitalization stocks.

Stocks certainly have history on their side. According to the Stock Trader's Almanac, which tracks market trends, election years have usually been up years, as incumbent administrations try to stimulate the economy so voters will keep it in power.

Dow industrials in the spotlight
The slate of companies reporting earnings this week includes Dow 30 companies such as diversified manufacturer 3M, financial services giant Citigroup, healthcare firm Johnson & Johnson, auto maker General Motors, software leader Microsoft, and photographic company Eastman Kodak.

Motorola, Merrill Lynch, Ford Motor, Franklin Resources, AMR, the parent of American Airlines, and Southwest Airlines are also due to report results.

Investors will be eager to learn more about the state of the manufacturing sector, so they will be looking closely at 3M’s earnings, said Thomson/First Call’s Joseph Cooper.

“GM will also be important because we’ll hear what the outlook is for the car industry in 2004, and that refers to the strength of the consumer. But the earnings report of the week will be Microsoft on Thursday -- that will offer clues about the state of business investment,” Cooper added.

A consensus of analysts polled by research firm Thomson/First Call now expects firms in the S&P 500 index to report earnings climbed 22.5 percent in the fourth quarter from the same period a year before. That follows a 21.4 percent gain in the third quarter.

At present, 62 percent of the companies reporting earnings have beaten Wall Street’s earnings targets, 23 percent have met expectations and 15 percent have missed them.

It will be a quiet week for economic news, with reports on the U.S. housing sector, weekly jobless claims and the Conference Board’s index of leading economic indicators, which aims to predict economic activity in the coming months, the only data of note.

Despite some early weakness, stock market averages climbed again last week. The Dow and the S&P 500 both recorded their eighth straight weeks of gains, while the tech-laden Nasdaq Composite index managed its sixth consecutive up week.

Reuters contributed to this story.