Goldman Sachs strategist David Kostin says the stock market's next phase will be decided by the earnings season. In a note, he said the market needs to see sequential improvement in non financial companies' earnings; margin stabilization, and an "upward inflection" in company comments on the outlook for the second half and 2010.
Kostin said that based on his recent discussions with Goldman clients, it appears investors have "adopted a wait-and see mindset ahead of 2Q results." Analysts expect to see about a 36 percent decline in second quarter earnings.
"The bears argue that the market will decline to the 800 level (on the S&P 500) and emphasize the weak employment situation and the rising savings rate. The more bullish investors cite the potential for positive EPS surprises which could push the market closer to 1000," he wrote.
The market has been sliding sideways to lower in recent weeks as investors fret the economy's recovery efforts are weaker than previously expected. Stocks have backtracked about 9 percent from June's highs. The Dow in the past week was down 1.6 percent at 8146; the S&P 500 fell 1.9 percent to 879, and the Nasdaq was off 2.3 percent at 1756.
"The thing that impresses me most is the dominance of doubt here," said Jim Paulsen, chief investment strategist at Wells Capital Management.
From 'Mad Money':
Paulsen said Wall Street and Main Street are showing signs of improvement, yet there's an investor paralysis about stocks. For instance, the trade deficit reported Friday was at its narrowest level in nine years, but the market focused instead on a weaker consumer sentiment report. "Nobody gives it any credence, and I think that's interesting. I like the dominance of doubt, and what that does for me as an investor with so many people waiting for this pull back. I don't think it can pull back much further."
"You've got a lot of people sitting on the sidelines, waiting for it, willing to buy on a dip. You've got the two things you might accuse of putting us in a trading range - the surge in oil and the surge in long rates. Guess what? They both reversed," he said. At the end of the week, the 10-year was yielding 3.29 percent, well below the 4 percent it hit in June. Oil declined a stunning 10.3 percent in the past week, closing Friday at $59.89 per barrel, its first settle below $60 since mid May.
Richard Bernstein, president of Richard Bernstein Capital Management and former chief strategist at Merrill Lynch, agrees that the decline in oil is a positive. Oil has fallen, with other commodities, as fears about a recovery have risen. "You don't want high oil prices. That's an end of cycle phenomena...The more they fall, the better," said Bernstein, who is also a CNBC contributor.
This has not made Bernstein more bullish on stocks, however. "I'm neither here nor there. I don't think it's a time to be wildly bullish...Could we hit a new low? Yeah, we might, but I think it's pretty clear that monetary and fiscal stimulus are behind us. I think we're in this period where you want to be normally weighted in stocks, but I don't think it's time to be wildly aggressive," he said.
Bernstein said the realization that the economic recovery is wobbly has spooked some investors and shows the stock market got ahead of itself. He sees choppy trading through the summer. "We're probably going to get a series of pretty good entry points into the market, and I actually think the market's going to be much better in the second half of 2010. That's when I think fiscal and monetary stimulus will kick in. People are just too impatient," he said.
Patrick Kernan, who trades S&P 500 options, said the coming week looks like it could be quiet for stocks, but there could be surprises because of options expirations Friday. "The near term (market) call with expiration week is pretty darn tough because of the volatility," said Kernan, who trades with Cardinal Capital.
"I think the fact we're below the 200-day moving average (882) is negative," he said. "What I was looking for was if we closed below 871 (Friday), it would be negative for next week. If we closed above 883, I thought that would be positive. I think the fact we sat and didn't do anything I think is indicative that we're going to be a little range bound for a good portion of the week."
In Treasurys, there could be some volatility as the market heads into its own summer doldrums. "You're going to have a slow, tortuous grind," said Michael Franzese, head of Treasurys trading at Standard Chartered.
He said the market will focus on the weekly jobless claims data, reported Thursday.
Other data in the week ahead includes inflation data, reported Tuesday, with PPI and Wednesday with CPI. Housing data comes towards the end of the week, with the latest mortgage applications data Wednesday; the National Association of Home Builders survey Thursday, and housing starts Friday.
More From CNBC.com
The monthly federal budget statement is reported Monday. Retail sales and business inventories are released Tuesday. The Empire State survey and industrial production are out on Wednesday morning. The minutes of the last FOMC meeting are released by the Fed Wednesday afternoon. The Treasurys international capital flow data is released Thursday. The Philadelphia Fed survey is also issued that morning.
What Else to Watch
Treasury Secretary Tim Geithner travels to Europe and the Middle East. On Thursday, former Treasury Secretary Hank Paulson appears before a House committee to testify on his role in the Bank of America, Merrill Lynch merger.
Court hearings are scheduled to start Monday before a civil court in Miami in the government's case against UBS. The IRS is seeking the identity of UBS American depositors who had undeclared bank accounts between 2002 and 2007.
The Senate Judiciary Committee Monday holds a confirmation hearing on the nomination of Sonia Sotomayor to the Supreme Court.
The Bank of Japan has a rate decision Tuesday, and China's second quarter GDP is reported Wednesday.
On Monday, CSX and Novellus report. Earnings season gets busy Tuesday with the release of Intel , Goldman Sachs , Johnson and Johnson and Yum Brands .
Wednesday's the day for Abbott Labs and Gannett reports.
On Thursday, JPMorgan Chase , Google , IBM and Nokia report.
Also reporting Thursday are Marriott , Baxter , Biogen Idec , Genuine Parts , Novartis , Harley-Davidson , and Amphenol report.
On Friday, General Electric, Bank of America , Citigroup , Mattel , and BB&T report.
Dell's analyst day is Thursday.
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