After a five-week rally, stocks face one of their toughest challenges yet - a very nasty earnings season.
In the coming week, dozens of companies report, including such major names as Goldman Sachs, Johnson and Johnson, Google, Intel, J.P. Morgan, Citigroup and General Electric. For S&P 500 companies, first-quarter earnings are expected to decline nearly 38 percent.
There is also a full calendar of economic data such as retail sales, industrial production and inflation data.
Given the lack of earnings guidance this quarter, traders are debating whether earnings will be a positive or negative catalyst for stocks, since the opportunity for surprises is greater than in the past. Goldman Sachs says just 25 percent of the S&P 500 now give quarterly guidance.
"The divergence in consensus is the widest it's been," said Peter McCorry, who trades bank stocks at Keefe, Bruyette.
"I don't think we'll see the V-shaped turnaround in the market continue from here ... It will be more drawn out," said McCorry. "The volatility we have is no accident. Expectations are very varied right now. We're very emotional, headline driven, minute to minute."
Wells Fargo Thursday surprised the market with a preannouncement on its earnings, saying it would report profits that are double Wall Street expectations. The announcement fired up a rally in stocks and drove the financial group 15 percent higher on the day. Analysts are watching closely as other financial institutions report in the coming week, and some think the Wells news may bode well for the group despite expectations for more write downs.
"These guys (banks) are able to borrow money at very low rates and lend it out to medium to high rates. We're still concerned about the assets on their balance sheets," said Jefferies managing director Art Hogan. "The good news is they are making profits. The bad news is they still have to deal with the toxic assets, and that will take time to solve. That's why you don't invest in this space. You trade the space."
Traders have also been focused on the government's stress tests for the top 19 financial institutions that have taken funds form the Troubled Asset Relief Program. Treasury is expected to release its findings at the end of the month, after financial institutions report earnings.
Retail sales, a barometer of consumer activity, tops the list of key data in the week ahead. Deutsche Bank chief U.S. economist Joseph LaVorgna expects to see a slight gain in March retail sales but he does not expect the trend to continue. Retail sales is one of the February data points that was better than expectations. "There's a little bit of growth, but I think you're getting it from rebates and that will disappoint," he said.
"The laundry list of worries still outweighs the greens shoots," he said. "If you look on average in the last 10 years, the growth rate of consumer spending was equal to if not less than it's long term trend." But what was different was that some of that spending was fueled by easy credit in an economic environment that might not otherwise have supported it. Therefore, it is unlikely consumer spending will rebound to that level any time soon.
"Since we know we're not returning to that environment, the growth rate has to be lower," he said. "There's no way to escape the fact that even though we're bottoming, what we're expecting going forward will be very very mild."
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Other economic news to watch includes the Fed's Beige Book on the economy, which is released Wednesday. There is also inflation data, reported Tuesday in producer prices and Wednesday in consumer prices. Other data includes business inventories and the NFIB small business survey Tuesday; the Empire State Survey, industrial production and Treasury capital flows Wednesday; weekly jobless claims, housing starts and the Philadelphia Fed Survey Thursday, and consumer sentiment Friday. The National Association of Home Builders reports their survey Wednesday.
Fed Chairman Ben Bernanke gives the keynote speech at noon Friday at the Kansas City Fed's conference on innovative financial services for the underserved. Kansas City Fed President Thomas Hoenig gives the opening remarks speaks at the event. On Thursday, Atlanta Fed president Dennis Lockhart speaks on the challenges of the financial crisis at 1 p.m.
The heart of the debate about the stock market's direction goes straight to the view investors hold on the economy. Stocks have rallied, in part, on the idea that some better-than-expected economic news, while still very negative, is a sign of a potential turn coming in the economy.
Bob Doll, vice chairman of Black Rock, is one of those who believes the turn is underway. On "Squawk Box" Thursday, he said the worst of the economic decline was in the fourth and first quarters, and investors should be moving some money out of safe assets like cash and Treasurys and into riskier assets like stocks and corporate bonds. "We think the worst of the recession is in the rear view mirror and the market continues to be in a bottoming process," he said.
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Bill Stone, chief investment strategist for PNC Wealth Management, said he believes it's too soon to tell whether the economy is in a bottoming process.
"The market has pretty much gotten to overbought levels, but it came off hideously oversold levels," said Stone. "It would make sense to be overbought for awhile, and you solve it hopefully by going sideways for awhile. We think our position is to be base line, waiting, but stay to high quality. Some people think it's the turn. We don't think you can definitively say that this is sustainable."
Stone said the question about earnings is whether companies will give any glimpse as to how they are doing in the current quarter and beyond. "Some of these guys have been too optimistic for some time ... Well now you get to the point, and this is what you're seeing too with strategists, is many cut their expectations too low."
"Psychologically, that's kind of normal. When it comes to CEOs, they might just decline to give guidance," he said.
Stone said its possible the market view of negative data could turn negative again. "The thing that's dangerous is how far the market's willing to look forward. Right now, it's looking forward but that could come crashing back on you. We're looking for a second half of the year stabilization," he said.
"The one thing this (past) week really lacked was economic data. We had a couple of things, but in the reality of the previous week, the better than expected, horrible economic data were definitely part of the rally. We just didn't have that tail wind this week. Next week, we'll see if it's a tail wind or a head wind," he said.
Goldman Sachs, Intel and Johnson and Johnson report earnings Tuesday, while Abbott Labs and Peabody Energy report Wednesday. On Thursday, J.P. Morgan, Google, Baxter, Harley-Davidson, Nokia, Parker Hannifin, Biogen Idec and Southwest Air report. Citigroup, General Electric and Mattel report Friday.
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