The 4-month-old rally faces a big challenge in the coming week, as more than 250 companies release second-quarter results, including a number of
Expectations are high entering earnings season, with many investors hopeful that a second-half recovery is possible. But investors who have snapped up stocks on the belief that results will be strong may end up ditching them if the quarter turns out to be merely in line with estimates.
"There are a lot of people buying into the rumor, and once we get news, they could be selling -- that's why trading during earnings season will be choppy," said Charles Ryan, equities analyst at BB&T Asset Management. "
was a good example. They came in line with estimates, guided numbers up and it still sold off."
That said, stocks have been holding steady despite some bad news, like in Thursday's session when
warned, yet finished with sizable gains anyway.
Earnings preannouncements have been promising, with the ratio of negative ones to positive ones at 2-to-1, compared to the historical average of 3-to-1, according to Thomson First Call.
A number of companies in sectors that have outperformed the broader market are due to report results next week, like large-cap financials, medium-sized banks, airlines and technology. Markets will be looking closely at Monday's news from
, Tuesday's release from
and Wednesday's comments from
J.P. Morgan Chase
"The financials will be important because they're a good proxy for the economic environment out there," said BB&T's Ryan. "And with
, you'll get some big tech news as well. Those two sectors have been the most resilient, and it's important for them to show the numbers that investors expect."
Thursday will be a big day for earnings, with six blue-chips releasing earnings, including Microsoft,
, which is a bellwether for the airline industry.
Market watchers hope the rally can hold up during earnings season. "It's never what they earn. It's how they react," said Frank Gretz, market analyst at Shields & Co. "
numbers weren't wonderful and the market took it well. Looking at Thursday, the news wasn't bad and the market came down -- but it was on low volume. In a healthy market, the market takes news in a positive way. Until that changes, I think you need to be positive here."
In addition to earnings, the market will be awash in economic data. Tuesday brings the release of June retail sales data, which are expected to show growth of 0.5%, up from 0.1% in May. Excluding auto sales, retail data are expected to show growth of 0.3%, up from May's 0.1% increase.
Wednesday is the big economic release day, with May business inventories and June results for CPI, capacity utilization and industrial production. Ryan said industrial production, which is expected to grow by only 0.1%, will be an important barometer, since "the consumer can only do so much to boost the economy."
Look for the usual release of weekly jobless claims, which haven't been showing much improvement, on Thursday, along with building permits and housing starts for June. Preliminary data on the Michigan sentiment index close out the week. Economists expect the number to jump to 90.5 from 89.7.
Markets were positive last week, with technology leading the way. The
rose the most, gaining 70.44 points, or 4.2%, to 1733.90, its third-highest close of 2003. The broader markets posted more moderate gains, with the Dow Jones Industrial Average up 49.38 points at 9119.59 and the
up 12.43 points at 998.13.
No matter which way markets move this coming week, prepare for lots of news and a bumpy ride. "I don't necessarily think a selloff would be bad, because it gets the fast money out of the way. Investors can tolerate some pain as long as they see the big picture improving," said Ryan. "It should be a fun week, if nothing else."