The Coming Week: Don't Look Down

The potential for disappointment lurks in a few big earnings reports.
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Although investors will continue to debate the timing of an interest rate hike next week, a batch of earnings from the technology and retail sectors could also influence trading, possibly for the worse.

Of particular interest will be earnings from

Dow

components

Hewlett-Packard

(HPQ) - Get Report

and

Wal-Mart

(WMT) - Get Report

on Thursday. H-P said this week that earnings would be in line with previous forecasts, but investors were disappointed that the company wasn't able to offer an upside surprise.

Results from Wal-Mart could also prove a letdown. The company said earlier this month that fourth-quarter earnings could be hurt by a change to Germany's tax law. Wal-Mart is expected to earn 63 cents a share, while H-P is slated to earn 35 cents.

"If I had to guess, I'd say we'd be flat to modestly down next week," said Dave Briggs, head of equity trading at Federated Investors.

Briggs noted that the expiration of options on stocks and stock indices next Friday could add some volatility toward the end of the week. Markets will be closed on Monday in observance of Presidents' Day.

Among other companies reporting earnings next week are

Applied Materials

(AMAT) - Get Report

on Wednesday and

Ciena

(CIEN) - Get Report

,

DaimlerChrysler

(DCX)

,

Nextel

(NXTL)

and

Nordstrom

(JWN) - Get Report

on Thursday.

Most companies have reported solid numbers for the fourth quarter, and Thomson First Call predicts that earnings grew by 28% overall -- the best performance in more than a decade. But much of the good news has now been priced in and some investors are getting concerned about rich valuations in the technology sector.

The

Nasdaq

declined this week for a fourth straight week, while the Dow and

S&P 500

posted small gains. Analysts have been saying for some time that higher-quality names are poised to outperform. Since Jan. 16, the Nasdaq has shed 4%, while the Dow has climbed 0.2% and the S&P is up 0.5%.

Peter Cardillo, chief market strategist at S.W. Bach, thinks investors will probably be focused on economic news next week, particularly the producer and consumer price indices, which are due out Thursday and Friday, respectively.

This week,

Federal Reserve

Chairman Alan Greenspan painted a rosy picture of the U.S. economy and said that with inflation low, the central bank can afford to be patient in raising interest rates. The PPI for January is slated to rise 0.3% while the core rate, which excludes food and energy, is seen climbing just 0.1%. The CPI is also expected to climb 0.3%, with the core rate up 0.1%.

Investors will also be watching the initial jobless claims on Thursday for signs that the employment market is picking up. Greenspan said he expected job growth to quicken "before long" but said there's been little evidence of growth so far.

While industrial production and capacity utilization data usually don't move markets, the numbers are important given that the Fed has repeatedly cited slack resource use as a reason for keeping rates low. Analysts expect capacity utilization to inch up to 76.2% from 75.8% in December. Industrial production is seen climbing 0.7%. Both figures will be released on Tuesday.

Housing starts are due to be released Wednesday, while the Conference Board's leading economic indicators and the Philadelphia Federal Reserve survey are due out on Thursday.

Investors are also likely to keep a close eye on the dollar, which has recently fallen to new lows against the yen and euro. A weak dollar is both a positive and a negative for investors. While it can help boost corporate earnings and reduce the trade deficit over time, it can also lead to higher inflation and can diminish the value of U.S. assets to foreign investors. In this environment, a softer dollar can also lead to higher energy prices, something Greenspan referred to as a "chronic concern."