Volatility could be the name of the game this week for the stock market with the earnings machine running at full tilt and the Middle East conflict gaining intensity.
So far second-quarter earnings are shaping up stronger than expected, despite disappointments from some big names in the technology sector. If more strong earnings reports flow in, that could coax some investors back into the stock market, analysts said.
The wild card is the Middle East.
Oil ended the week above $74 a barrel as Israel’s army called up reservists and launched small-scale raids in Lebanon in an effort to stop Hezbollah rocket attacks.
The economy’s health will get more scrutiny from Wall Street this week. Major indicators on tap include existing home sales, consumer confidence, durable goods orders, new home sales and second-quarter gross domestic product.
“The story is going to continue to be earnings and the Middle East,” said Fred Dickson, market strategist at D.A. Davidson & Co. in Lake Oswego, Ore.
Dickson pointed out that “a few more than expected companies have been lifting earnings guidance, so that’s providing an injection of some positive energy into the market.”
Nevertheless, stocks fell Friday, wrapping up a volatile week after personal computer maker Dell Inc. warned of a shortfall in quarterly earnings and revenue. The fighting in the Middle East also cast a pall over the market’s mood.
For the week, the blue-chip Dow Jones industrial average rose 1.2 percent and the Standard & Poor’s 500 Index gained 0.3 percent, while the Nasdaq Composite Index slid 0.8 percent. For the Nasdaq, it was the third straight losing week, and the tech-heavy index closed at a 14-month low.
“We’re seeing a high degree of investor sensitivity to the situation in the Middle East,” Dickson said. “Very few clients seem interested in exploring stock bargains ... and they have not forgotten the market meltdown of 2000 and 2001. Their fear is the Middle East will trigger a similar selling pattern.”
The conflict between Israel and Lebanon has driven oil prices higher. At Friday’s close, U.S. crude oil for September delivery settled at $74.43 a barrel. A week ago, crude briefly hit a record $78.40 — the highest price since the New York Mercantile Exchange began trading oil futures in 1983.
Federal Reserve Chairman Ben Bernanke touched off an explosive stock market rally Wednesday when he told the Senate Banking Committee he believes core inflation will moderate in the coming quarters. His remarks suggested that the Fed may be nearly done with its two-year cycle of raising interest rates.
The euphoria did not last long. After flying high on Wednesday, stocks came back to earth and finished lower on both Thursday and Friday.
“The rally in the wake of Federal Reserve Chairman Bernanke’s testimony reflected short covering that did not attract any follow-through buying,” said Chris Burba, short-term market technician at Standard & Poor’s in New York.
Earnings expectations for the second quarter have climbed recently. Reuters Estimates now projects S&P 500 earnings grew 10 percent in the second quarter, up from an expected 9.2 percent the previous week.
“We’re going to go back to watching the parade of earnings, and we’ll hopefully see some companies guide a little bit better than Dell,” said Todd Clark, director of stock trading at Nollenberger Capital Partners in San Francisco.
This week, drugmakers Merck & Co., Schering-Plough Corp. and Bristol-Myers Squibb Co. will report quarterly results. Investors may expect strong earnings from the health sector after biotechnology giant Amgen’s quarterly results beat estimates last week, Dickson said.
Oil giants Exxon Mobil Corp. and rival ConocoPhillips will report earnings, as will Kraft Foods Inc., Amazon.com Inc. and General Motors Corp.
Economic reports due this week include:
- Existing home sales, Tuesday. Sales are expected to show a drop to an annualized pace of 6.58 million units in June from a pace of 6.67 million in May, according to economists polled by Reuters.
- New home sales, Thursday. Sales are forecast to show a decline to a seasonally adjusted annual pace of 1.160 million units from 1.234 million units in May.
- Gross domestic product, Friday. The Commerce Department is expected to show second-quarter economic growth of 3 percent, down from 5.6 percent in the first quarter.
- The Conference Board’s consumer confidence index, Tuesday, pegged at 104.0, down from 105.7 in June.
- The Fed’s “Beige Book” report, Wednesday, a look at the regional economies served by the 12 Federal Reserve district banks.
- Durable goods orders, Thursday, forecast up 1.8 percent after a drop of 0.2 percent in May.
- The University of Michigan's consumer sentiment index, Friday, forecast at 83.0, down from 84.9 in June.
