Earnings flood seen guiding Wall Street

Earnings will command Wall Street’s attention this week, as 178 companies in the Standard & Poor’s 500-stock index report results, making it the busiest week of the first-quarter reporting period. Investors will be hoping upbeat corporate results can eclipse the market’s worries about rising interest rates and the geopolitical tensions that have battered stocks in recent weeks.

Aside from the flood of earnings, investors will also be keeping a watchful eye on Federal Reserve Chairman Alan Greenspan when he delivers his version of the current economic climate before the Joint Economic Committee on Wednesday morning. Wall Street will be listening for any clues about when the Fed may decide to tighten credit again.

A series of better-than-expected reports on the economy, including a strong March employment report and a surprising rise in retail sales, has convinced Wall Street that the Fed will soon begin to raise its key federal funds rates again after keeping it at a four-decade low for over a year to stimulate economic growth. An unexpected rise in last week’s March consumer inflation report has fanned Wall Street’s rate-hike fears.

“We’ve seen a sea change in Wall Street’s rate expectations,” said Scott Anderson, senior economist at Wells Fargo bank. “We’ve gone from no sense of urgency about interest rates going up to a sense that they’ll go up sooner rather than later, and we’ve seen that play out in the Treasury market with rates moving up significantly.”

For its part, the Fed has been promising for months that it will be “patient” in deciding when to raise interest rates again. On Friday, Alfred Broaddus, president of the Richmond Fed, said the Fed is “some distance” from conditions that would require a rate hike. But the worry on Wall Street is the prospect of an overheating economy may force the Fed’s hand. Last week, some on Wall Street were betting on a rate hike as soon as the Fed’s late-June meeting.

In the equity market, the interest rate fears have led some investors to shun more volatile technology issues and turn to classic "defensive" investments — stocks that are expected to fare well even in a period of higher interest rates, including drug and consumer staples. Financial stocks, which are especially sensitive to interest-rate moves, have suffered. Citigroup, the nation's largest financial firm, saw its shares fall last week despite delivering sturdy earnings.

Still, Peter Cardillo, chief strategist at S.W. Bach, thinks the market will stabilize this week.

“The stock market is in a transition period; it’s adjusting to higher interest rates, so we’ve seen a rotation in the market, especially in the technology sector, but now I think we’ll see some stabilization because I think we’re probably getting oversold here,” Cardillo said. “I think the stock market will tend to trend higher [this] week, provided there are no major geopolitical problems.”

For at least the past three months, the stock market has essentially drifted sideways, and investors are searching for the next big catalyst that will drive the market higher after the stellar gains it has made over the last year. The benchmark S&P 500 index is up more than 40 percent from the 2003 low hit just over one year ago.

This week’s flood of corporate quarterly results could be the catalyst. So far, earnings have been coming in, for the most part, at or above Wall Street's forecasts. Of the nearly 100 companies in the S&P 500 index that have issued their first-quarter scorecards, 72 percent have surpassed earnings expectations, 16 percent have met them and 10 percent have fallen short, according to earnings research firm Thomson Financial/First Call.

A consensus of analysts polled by Thomson expects earnings for the companies in the S&P 500 index to grow by 18.7 percent in the first quarter. “We think it’ll be more like 20, or closer to 21 percent when it’s all said and done,” said Gint Rimas, research analyst at Thomson. Such a performance would mean a third straight quarter of robust growth and rising well above the long-term average for quarterly earnings.

The question is whether the stellar quarterly performance is already factored into stock prices. Particularly crucial this earnings season will be what corporate managements say about their business outlook points out John Lynch, chief market analyst at Evergreen Investment Management.

"The market wants to be surprised to the upside, and that really is going to be the key going forward as the majority of companies report," said Lynch. “It's what they say going forward, how they are projecting the second-quarter and full-year."

Fourteen members of the Dow Jones industrial average will report earnings results this week. The list includes well-known blue-chip names like General Motors, Altria, J.P. Morgan Chase, Honeywell International, Merck and Microsoft, and it also includes some newer members of the Dow 30 index: drug firm Pfizer, which reports on Tuesday, and insurer American International Group, which is due to report on Thursday

This week’s economic calendar will be light.

Weekly industry data on new mortgage applications from the Mortgage Bankers Association due on Wednesday will be closely watched for signs that mortgage rates — which hit their highest levels in three months in the week ended April 9 — are prompting a drop-off in refinancing. Wednesday also brings the Fed’s "beige book" report — the central bank's anecdotal take on the U.S. economy. And a report on durable goods is on tap for Friday.

The health of the U.S. labor market is an important issue for Wall Street after a surprisingly strong jobs report in March. With this in mind, Thursday’s weekly jobless claims figures will be watched closely said Wells Fargo’s Scott Anderson.

“The Fed is waiting for the job market to improve before making its move on rates, so initial jobless claims will be important [this] week,” Anderson said. “We saw a jump last week because of the Easter holiday. Another increase in jobless claims [this] week may be more concern that the momentum in the labor market is only temporary.”

Reuters contributed to this report