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Financials Lead Rebound; Merck Skids

Stocks advanced Monday, led by financials, as the market looked for insight into the second quarter and braced for closing its worst quarter in 5 1/2 years.

Today is the last day of the quarter and analysts now expect earnings for S&P 500 companies will be down 8.1 percentfor the quarter, according to data compiled by Reuters. That's a far cry from the 4.7 percent growth expected at the beginning of the quarter and the 5.5 percent decline projected as recently as last week.

Earnings for financial companies are expected to have dropped 49 percent during the quarter.

"As the financials go, the market goes. The financials are leading us higher," Matt Cheslock, a senior specialist at Cohen Specialists, told CNBC. "We’re seeing commodities sell off pretty aggressively and I think that’s a rotation of money that’s going from commodities back into financials and trying to pick a bottom."

General Motors was the biggest gainer on the Dow ahead of March auto sales data, due out Tuesday.

Rounding out the top three were Citigroup, which announced plans to split its consumer banking unitfrom its credit-card business, and JPMorgan, which has taken a beating in recent weeks over its plans to purchase Bear Stearns.

Shares of Lehman Brothers, which have been hammered amid rumors that the brokerage will be the next domino to fall, said it's suing Japanese trading house Marubeni to recover $352 million lost in an alleged financial scam.

There were some concerns that Swiss bank UBS , the European bank hardest hit by the subprime crisis, may report additional write-downs this week following a weekend announcement that it has already begun to lower the value of some structured securities.

"It strikes me that the big securities firms are just in a dramatically different business than are the commercial banks," Donald Straszheim, vice chairman of Roth Capital Partners, told CNBC. He suggests that "investors should be more focused overseas -– that’s where the growth is going to be, not in the U.S."

So far, the Dow Jones Industrial Average is down nearly 8 percent for the quarter, the S&P 500 is off more than 10 percent and the Nasdaq, nearly 15 percent.

The worst-performing sector this quarter was tech, down 16 percent, followed by telecoms and financials, both down about 15 percent so far this quarter.

Shares of Google were on track for their biggest quarterly decline since the stock debuted in August 2004, down 36 percent since the beginning of the year.

Overseas, markets have taken an even worse beating, making valuations attractive. Chinese stocks are off a whopping 32 percent since the start of the year, India has fallen 19 percent and Japan and Hong Kong are off more than 16 percent, according to a report in today's Wall Street Journal. In Europe, the German market has shed nearly 19 percent and French stocks are off more than 16 percent.

Equity capital continued to flow out of the U.S. for a seventh straight week, according to a report from UBS, but the pace slowed from the prevoius week. A net $820 million left the U.S. last week, compared with $2.2 billion a week a earlier.

The US Treasury announced a regulatory overhaul that would give broad new powers to the Federal Reservein the biggest overhaul of financial regulation since the Great Depression. The government suggests that the plan might have been able to prevent the kind of crisis that is currently ripping through the financial markets. The primary way that would happen would be stricter requirements for disclosure, which might have brought some of the current problems to light much sooner.

The market had little reaction to the release of reform details as traders widely believe it will take a long time for these reforms to go into effect -- probably after a new president is elected -- and their more pressing concern is the second quarter.

So far, there have been 242 negative outlooks from S&P 500 companies and just 169 positive forecasts.

"It's a long-expected requirement for the complex global financial markets. But there are quite a number of hurdles to cross on the way to the implementation," Bob McDowall, from Towergroup, told CNBC.

Merck tumbled about 15 percent, its worst day since the 2004 recall of Vioxx, after an expert panel said the company's joint cholesterol drug with

Schering Plough, Vytorin, showed no signs of working betterthan a cheaper generic statin.

There are some concerns now that Schering Plough, which is heavily dependent on Vytorin revenue, may not be able to survive as a separate entity.

The development came as AstraZeneca halted tests on its own cholesterol drug, Crestor, but for the opposite reason -- clinical tests had shown the drug far superior to a placebo in treating patients.

The news gave a boost to shares of rivalsAbbott and Pfizer , which have big cholesterol franchises.

In other corporate news, U.S. spirits maker Fortune Brands said on Monday it would begin repurchasing its own shares after losing out in an auction for Absolut vodka maker Vin & Sprit to French rival Pernod Ricard.

Shares of IAC/InterActiveCorp jumped after a court last week ruled in favor of the company in a dispute with a key shareholder. The ruling paves the way for the company to be split into five separate companies.

Philip Morris rose on its first day of trading since being spun off from Altria .

In economic news, the Chicago purchasing managers' index, a gauge of Midwest manufacturing activity, rose to 48.2 in March from 44.5 in February. The reading was better than the 46.7 analysts polled by Reuters had exected, but still pointed to contraction. A reading above 50 would indicate expansion.

The Milwaukee PMI fell, which, along with a weak report from the Philadelphia Fed, point to a slight drop in the national reading on manufacturing from the Institute from Supply Management, Ian Shepherdson, chief U.S. economist at High Frequency Economics, wrote in a note. Shepherdson expects the ISM reading, due out on Tuesday at 10 a.m., to slide to 47 from 48.3.

Still, some economists point out that consumer spending is a huge part of GDP and, unlike consumer sentiment, it's not in recession mode yet.

"The fact is that real consumer spending is still rising at a 1% rate in the first quarter," wrote Robert Brusca of FAO Economics. "I doubt that, without a drop in consumer spending, recession is in the cards."

Still, Brusca says, "weak employment can undermine consumer spending if it is weak enough."

A clearer picture will emerge after the release of the March jobs report, due out before the bell on Friday. The consensus is for nonfarm payrolls to have dropped by 60,000, following a 63,000 decline in February, and for the unemployment rate to tick up to 5 percent from 4.8 precent.

-- Reuters contributed to this article.

This Week:

MONDAY: Fed's Yellen speaks; End of first quarter
TUESDAY: Auto sales; ISM manufacturing index; construction spending
WEDNESDAY: MBA applications; factory orders; oil inventories; Bernanke testifies; Earnings from Monsanto, Best Buy, Research In Motion
THURSDAY:Jobless claims; ISM services index; Fed's Yellen speaks
FRIDAY: Jobs report

Send comments to cindy.perman@nbcuni.com.

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