NEW YORK (
) -- With earnings season wrapping up, investor focus will likely switch back to the macro picture in the coming week, as worries about an economic slowdown mount.
Stocks struggled this past week as several economic reports came in weaker than expected, raising concerns about the recovery.
Regional manufacturing activity in the New York and Philadelphia region fell sharply, while housing starts and existing-home sales continued to disappoint.
Meanwhile, quarterly reports from retailers also showed signs of weakening consumer demand as oil and gas prices climb.
plunged 17.5% on Friday after its quarterly profit disappointed. The San Francisco-based fashion apparel retailer said raw material costs increased more than expected and cut its earnings forecast for the full year.
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Dow Jones Industrial Average
finished the week lower by 0.6%. The
closed the week lower by 0.3% and 0.9%, respectively. It was the third straight negative week for the Dow, the first such streak since August 2010, resulting in a cumulative 2.3% decline for the blue-chip index.
With the economic outlook cloudy once again, investors in the last couple of weeks have moved out of risky growth sectors such as industrials and materials and piled into defensive stocks, such as health care and consumer staples. It is not clear yet whether the defensive moves are simply a case of sector rotation or the harbinger of a steeper correction in the markets.
Peter Tuz of Chase Investment Counsel expects this "risk-off" trade to continue until investors get more clarity about the economy. "The fear that we are slowing down again seems to be growing. People seem to be stretched financially and that is being reflected in the guidance for sales by retailers," said Tuz.
According to Marc Pado, chief U.S. market strategist at Cantor Fitzgerald, however, the rotation is typical for this time of the year. "We are going to see a little pullback. The Sell in May and Go Away (adage) is not so much about the statistics but more about the psychology of summer," said Pado. "After Easter, you don't have a consumer holiday until back-to-school. And fund managers are taking their families on vacation too."
Overseas, Europe's debt crisis continued to weigh on investor sentiment, even as the media spotlight fell on former IMF Chief Dominique Strauss-Kahn, who faces sexual assault charges.
Fitch Ratings downgraded Greece debt by three notches. Investors will also be waiting for the results of the Spanish regional election this weekend. The ruling socialist party is expected to suffer losses, and there are fears that local governments will report worse-than-expected budget figures after the vote.
"I don't think there are effective solutions to the European debt crisis at all," said Chris Low, economist at FTN Financial. He said the unstated but well understood goal of policymakers in Europe was to delay restructuring for the next three years until the debt-to-GDP ratio gets under control, allowing these countries to raise financing more easily.
But the problem with buying time, Low said, is that "once debt holders figure it out -- and they are beginning to -- they have no interest in holding that debt and they are going to try and sell it. When they do, yields will climb and Greece and Portugal will not be able to raise more debt."
Analysts expect the situations in Europe and the Middle East to be persistent wild cards this summer.
There will be no economic reports on Monday, with
being the only highlight among quarterly reports. Analysts expect the company to report a profit of 52 cents per share on revenue of $1.8 billion. In the year-ago equivalent quarter, Campbell posted earnings of 54 cents per share.
On Tuesday, the U.S. Census Bureau will release its new-home sales report for April. Economists forecast new-home sales to be unchanged at a 300,000 annual rate in April, according to
. Medical device company
and semiconductor equipment major
are two earnings reports of note on Tuesday.
Analysts expect Applied Materials to report an adjusted profit of 37 cents a share for the first quarter, up from earnings of 22 cents a share last year. Revenue is expected to come in at $2.77 billion.
On Wednesday at 8:30 a.m. ET, the Commerce Department will release the durable goods orders report, a leading indicator of industrial production and capital spending. New orders for goods that last three years or longer are expected to drop 2% in April, according to
. Excluding the volatile transportation sector, durable goods orders are likely to have increased by 0.6%.
Quarterly reports to watch on Wednesday include
American Eagle Outfitters
On Thursday, the Commerce Department will release its second estimate for first quarter GDP. According to its advance estimate, the economy grew at an annualized rate of 1.8% in the first quarter. Economists expect an upward revision in GDP growth to 2%.
Thursday will also bring the Labor Department's weekly jobless claims report. Initial jobless claims are expected to drop to 400,000 in the week ending May 21 from 409,000 reported the week before. Continuing claims are forecast to remain steady at 3.7 million.
reports its first-quarter results on Thursday. The company's profits are expected to climb to 57 cents per share in the April-ended quarter from 48 cents a year earlier. Revenues are projected to come in at $701.2 million.
Investors will be interested to see what impact Japan's earthquake had on Tiffany stores in the region.
On Friday, the economic data will shed some light on the consumer with personal income and spending and the final reading of the University of Michigan Consumer Sentiment Index. Personal income is predicted to have increased by 0.4% in April, while personal spending is likely to have risen by 0.5%, according to consensus estimates.
FTN Financial's Low notes that, while consumer spending has increased in nominal terms over fourth-quarter levels, it has dropped in real terms. In other words, because of inflation, consumers are spending more but getting less.
The final reading of the Consumer Sentiment index is expected to remain unchanged at 72.4
The National Association of Realtors will also release its pending home sales index, which is a lead-in for existing-home sales activity. A pending sale is one in which a contract was signed, but not yet closed. It usually takes four to six weeks to close a contracted sale.
Pending home sales are expected to have contracted 1.8% in March after rising 5.1% in the previous month.
Written by Shanthi Bharatwaj in New York
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