The path of least resistance may be down this week for the stock market, since expectations for strong fourth-quarter scorecards have already fueled a hefty rally.
With stocks so richly valued, even good profit reports may not be enough to push them higher, analysts say.
“Everyone knows that the December quarter was very good,” said Stanley Nabi, managing director at Credit Suisse Asset Management. “There’s no surprise in that direction. My feeling really is that” this week, “there will be consolidation of the market.”
Earnings season kicks up another notch this week with reports from about 140, or almost 30 percent, of the companies in the Standard & Poor’s 500 index.
Scorecards from computer maker Gateway Inc., hamburger chain McDonald’s Corp. and drugmaker Merck & Co. Inc. will be among the key reports.
“Companies are reporting earnings above expectations and giving positive guidance for revenue going forward,” said Ozan Akcin, chief market strategist at Puglisi and Co. “That’s something we haven’t seen and it’s encouraging.”
But the bullish view of corporate earnings has already propelled stocks higher for most of January, analysts said, so the good news may already be priced into stocks.
In fact, the market shows signs of slipping, with the Dow Jones Industrial Average ending last week down after rising eight weeks in a row and the Nasdaq Composite index falling for the week after six up weeks. The S&P 500, however, notched its ninth straight week of gains.
“We expect the selling off and locking in profits to continue” this week, Akcin said. “I think everyone’s saying 2004 won’t show the same kind of returns as 2003, so everyone wants to lock those gains in now.”
High tide for earnings
Even with expectations for both strong earnings and a correction so high, some analysts think there is more room for growth in the market.
“With only 37 percent of the companies in the S&P 500 having reported fourth-quarter earnings, there is still plenty of room for positive earnings surprises that could push stock prices higher over the next two to three weeks,” Frederic Dickson, chief market strategist at fund firm D.A. Davidson & Co., said in his latest market outlook.
Earnings will come from a flood of companies. Those in focus will include McDonald’s, expected on Monday; Merck and Amazon.com Inc., both expected on Tuesday, and Gateway on Thursday.
Strong earnings last week were not enough to push all the indexes higher as Friday marked the first down week in more than a month for the Dow and Nasdaq.
For the week, the Dow slipped 0.30 percent and the Nasdaq fell 0.78 percent. The S&P, however, rose 0.15 percent.
U.S. blue chips fell on Friday but the technology-laden Nasdaq edged higher, as investors digested strong gains in recent sessions and struck a cautious tone before a torrent of earnings reports next week.
Economic data and the Fed
Economic data, including reports on the housing market and capital spending, will play second fiddle to earnings in the coming week.
On Monday, the National Association of Realtors will release its figures on the number of existing homes sold in December. The Conference Board releases its consumer confidence figures for January on Tuesday. The Commerce Department issues its reports on December durable goods orders and December new home sales on Wednesday.
Weekly claims for unemployment benefits will once again merit attention on Thursday. Friday’s agenda will be chock full of economic data: an estimate of growth in fourth-quarter gross domestic product; the University of Michigan’s final reading on consumer sentiment in January, and purchasing managers’ surveys in New York and Chicago.
The Federal Reserve’s policy-making body, the Federal Open Market Committee, will meet on Tuesday and Wednesday. It is widely assumed that the Fed will reiterate its commitment to keeping U.S. interest rates low for a considerable period. The results of the meeting are expected to be announced on Wednesday at 2:15 p.m. ET.