The uncertainties that have plagued Wall Street and overshadowed a strong earnings season will likely continue in the week ahead, as investors wrestle with high oil prices, the upcoming Iraqi elections and ongoing concerns about interest rates and inflation.
While earnings have been strong — analysts at Thomson Financial say actual earnings as well as estimates for companies yet to report show a 16.5 percent growth rate — the markets suffered their third straight week of declines last week.
Investors are bracing for discontent in Iraq ahead of its Jan. 30 elections, and some of January’s spike in oil prices can be attributed to concerns that Middle East terrorist attacks could target the oil industry.
Wall Street could see relatively light trading in the week ahead as well, despite a raft of earnings reports. The Fed’s Open Market Committee begins two days of meetings on Feb. 1, and with the minutes of the December meeting having shown some concerns over inflation, investors may want to wait and see what the Fed does. The nation’s benchmark interest rate stands at 2.25 percent, and a hike to 2.5 percent is considered likely.
Still, despite the uncertainty, very strong earnings — including a few positive surprises — could spur some buyers to return to the market.
Last week, oil prices and earnings disappointments from eBay Inc. and JP Morgan Chase & Co. unnerved investors. For the week, the Dow fell 1.56 percent, the S&P was down 1.41 percent, and the Nasdaq dropped 2.57 percent.
The last time the Dow and S&P 500 started January with three straight down weeks was in 1977.
On tap: GDP, consumer confidence reports
One possible bright spot for Wall Street could come Friday as the Commerce Department releases its first report on the fourth quarter gross domestic product, the largest single measure of economic growth.
Analysts expect GDP to grow at an annual rate of 3.5 percent for the quarter, though some believe that the 4 percent growth from the third quarter could be sustained through year’s end. A 4 percent GDP hike would likely provide some relief to the selling on Wall Street.
On Tuesday, the Conference Board will release its consumer confidence index for January. The reading is expected to come in at 101.5, down from December’s 102.3 result.
Big week for earnings
Ten of the 30 Dow industrials are reporting this week, alongside more than 150 other major companies. Of those, drug maker Merck & Co. will be closely watched to see the impact of its Vioxx catastrophe — the company pulled the arthritis drug from the market last year after it was associated with an increased risk of heart attack and stroke. Merck closed Friday at $30.36, down 38.2 percent from its 2004 high of $49.08 on Feb. 18. The company is expected to earn 50 cents per share when it releases earnings on Tuesday morning, down from 62 cents per share in the fourth quarter of 2003.
Microsoft Corp. is expected to see earnings fall year-over-year, a rarity for the software giant. The company, reporting Thursday afternoon, is expected to earn 32 cents per share for the quarter, down from 34 cents in the final quarter of 2003. Despite a special $3 dividend issued late last year, the stock has gained only 6.2 percent from its 2004 low of $24.15 on March 23, closing Friday at $25.65.
McDonald’s Corp.’s profits continue to climb as the company’s new management settles in. The fast-food chain’s stock closed Friday at $31.25, up 49.8 percent from its 2004 low of $24.86 on Jan. 28. The company is expected to earn 45 cents per share, up from 35 cents per share in the year-ago quarter.
Other companies reporting in the week ahead include:
- DuPont & Co., expected to earn 33 cents per share, up from 29 cents per share in fourth quarter 2003, when it reports on Tuesday;
- Johnson & Johnson, also reporting Tuesday, which is forecast to earn 64 cents per share, compared to 62 cents per share in the final three months of 2003;
- Altria Group Inc., which is expected to post earnings of 1.06 per share, the same as last year, when it reports Wednesday; and
- Verizon Communications Inc., reporting Thursday, which is expected to earn 64 cents per share for the quarter, up from last year’s 58 cents per share.