NEW YORK, Sept 21 (Reuters) - U.S. stocks could struggle to
stay close to nearly five-year highs next week as worries mount
about third-quarter earnings and the market appears primed for a
pullback from recent stimulus-driven gains.
A bevy of economic reports, including durable goods orders,
will grab attention, particularly after the Federal Reserve
unveiled its plan on Sept. 13 for a third round of aggressive
stimulus to help revive the flagging U.S. economy.
While the action ignited a rally in stocks, analysts have
worried that it may suggest the U.S. economy is in worse shape
than many had feared.
To be sure, stocks are at lofty levels and are likely to
attract investors hoping the market will ride out the year on a
positive note. The Dow Jones industrial average and the
benchmark Standard & Poor's 500 index remain close
to highs not seen since December 2007. The S&P 500 is up 16.1
percent since the end of 2011.
"I think the market certainly is ripe for a pullback. But
whatever the pullback, it's going to be rather shallow," said
Peter Cardillo, chief market economist at Rockwell Global
Capital, in New York.
"Any disappointment in key economic data that would reverse
the market's feeling the economy has stabilized, I think could
trigger a 2 to 4 percent pullback," he added.
Some of that move was seen this week in stocks, which posted
slight losses for the week. The S&P 500 slipped 0.4 percent for
the week. The Dow industrials and the Nasdaq each finished the
week down 0.1 percent.
Besides August durable goods orders, data on personal income
and spending is due next week, as well as new home sales and the
final read on U.S. Gross Domestic Product for the second
quarter.
Housing data has been surprisingly strong in recent months
and homebuilder shares have experienced massive gains. The PHLX
housing sector index is up 62.3 percent since Dec. 31.
But that strength has been offset by worrisome data on U.S.
manufacturing, which had been among the economy's strongest
sectors. The stubbornly high U.S. unemployment rate also has
kept a damper on Wall Street's mood.
THIRD-QUARTER GLOOM AND DOOM
Profit warnings from such high-profile U.S. companies as
FedEx helped cement the view this week that
third-quarter results could be a drag on the market.
"We've had some pretty negative pre-announcements, and those
announcements for this time frame have been a little more than
we've had in the past," Cardillo said.
Estimates for S&P 500 companies' third-quarter profits have
fallen sharply in recent months, and earnings now are expected
to drop 2.2 percent from a year ago, according to Thomson
Reuters data. It would be the first such decline in three years.
Outlooks for the third quarter are at the most negative
since the third quarter of 2001, the data also showed. The
negative-to-positive ratio for the upcoming earnings period
stands at 4.3 to 1.
Third-quarter earnings aren't expected to start in earnest
until after the second week of October, when Alcoa is
expected to kick off the reporting period.
"What I'm worried about is what I don't know," said Doug
Cote, chief market strategist at ING Investment Management, in
New York.
That includes negative surprises on earnings, he said, as
well as the chance that China's economy may be slowing faster
than economists previously thought.
"The aggressiveness of the (Fed's) quantitative easing has
caused me alarm," Cote said.
FLOOR FOR THE MARKET
The Fed's recent action followed a decision by the European
Central Bank to support debt-ridden euro-zone nations by
purchasing their debt.
Speculation on Friday that Spain was moving toward a bailout
request gave investors some relief. The debt-laden country,
which is likely to stay in focus next week, said it was
considering freezing pensions and speeding up a planned rise in
the retirement age as it raced to cut spending and meet
conditions of an expected international sovereign aid package.
Both central bank moves are expected to provide a floor for
the market, possibly through year end, analysts said.
"Financial markets will benefit more than the economy," said
Fred Dickson, chief market strategist at D.A. Davidson & Co., in
Lake Oswego, Oregon.
With the Fed's decision out of the way, investors are also
likely to turn their attention to other issues, including
November's U.S. presidential election, he said, and looming
decisions about U.S. fiscal policy.
(Wall St Week Ahead runs every Friday. Questions or comments
on this column can be emailed to:
caroline.valetkevitch(at)thomsonreuters.com)