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Week Ahead: Earnings Could Keep the Bulls Running

Corporate earnings will trump almost everything for the stock market in the coming week.

A string of better-than-expected third quarter earnings reports have helped fuel the stock market rally, taking the Dow above 10,000 for the first time in a year. But on Friday, disappointing results from General Electric and Bank of America drove stocks lower, showing how sensitive the market is to earnings news.

Oliver Quilla for CNBC.com

About half the Dow 30 and a quarter of the S&P 500 report in the week ahead. Analysts expect the majority of these companies to continue to beat expectations. Tech names, like Apple , Microsoft and Yahoo , report along with a parade of consumers, industrial and health care companies, like McDonald's , Caterpillar and Pfizer .

Traders are also watching the dollar, which continues to weaken as stocks and other risk assets move higher. They are also keeping an eye on the quick boil in oil prices, which moved sharply higher in the past week and are beginning to make some investors cautious.

The Dow gained 1.3 percent for the week, ending at 9,995, just shy of the 10,000 mile marker it reached on Wednesday. The S&P 500 scored a 1.5 percent gain, ending the week at 1,087. The dollar lost about 1 percent against the euro and the same against a basket of currencies.

"Basically, the market has gone up on proof of earnings, so after this earnings season, there's not going to be another catalyst before earnings early next year," said Binky Chadha, chief U.S. equities strategist at Deutsche Bank.

"It's the second quarter of sequential top line growth, and we also should have the third quarter of bottom line growth. In the fourth quarter, year on year earnings will be positive because Q4 of '08 was so bad...Q4 earnings should mark the end of the earnings recession," he said.

Of the 61 S&P companies that reported so far, 79 percent have reported better than expected earnings. Chadha said, however, companies are also beating on the top line, and as of Thursday, 65.5 of a smaller sampling had better than expected sales results.

Chadha, like a number of strategists, believes the stock market is set to move higher, for now. But he also thinks it will take a breather after the earnings season. He expects the S&P to reach 1125 by the end of the earnings season but it could pull back into the year end, reaching a level of about 1075, close to its current level. His target for the end of next year is 1260.

Econorama

The Fed's beige book, leading economic indicators, jobless claims and existing home sales are all worth noting in the week ahead, but more importantly there is a heavy calendar of Fed speakers.

Fed Chairman Ben Bernanke's appearances book end the week. He speaks first on Monday on the global financial crisis at the San Francisco Fed's Asia Economic Policy Conference at 11 a.m. EDT in Santa Barbara. Then he speaks again Friday at 8:30 a.m. on financial regulation and supervision at the Boston Fed's conference in Chatham, Mass.

Fed Gov. Kevin Warsh speaks Tuesday in Santa Barbara, and Fed Vice Chairman Donald Kohn speaks to the Boston Fed conference Friday. Richmond Fed President Jeffrey Lacker speaks Wednesday at noon in Richmond, and the Boston Fed's Eric Rosengren speaks that day in Massachusetts.

"Between Bernanke and Kohn, who spoke last week and basically talked about steady policy for an extended period, I think that should counter Warsh and Lacker who are both voters, and hawks," said Meg Browne, currency strategist at Brown Brothers Harriman.

The Fed's beige book on the economy is released Wednesday. Housing starts are issued Tuesday, and existing home sales are released Friday. On Tuesday, producer prices are reported, and weekly jobless claims and leading indicators are released Thursday.

Where the Dollar May Go Next Week

Dollar Daze

Traders have been following Fed speakers for clues on how soon the Fed will abandon its loose policy stance. Most economists don't expect the Fed to move rates higher until mid-2010 or later. As the Fed holds rates near zero, the dollar has slumped to the lowest level in more than a year.

Many in the markets believe the Administrations does not mind the dollar's weakness, as it helps the economy by improving the export picture. Corporate earnings this quarter and next should see some upside from the dollar's decline.

"The President should say he wants the dollar stronger. If it's in the national interest, then say it," said David Malpass, president of Encima Global. Malpass, who appeared on CNBC's "Squawk Box" Friday made the comment in a quick interview after his appearance.

Meg Browne, currency strategist with Brown Brothers Harriman, said she expects the dollar to continue to weaken against the euro in the coming week. But the Australian, Canadian and New Zealand currencies could weaken against the dollar because of a technical move.

"I guess the big risk for next week is either that earnings disappointments are more than people expect or for some other reason, there's a correction in the equities market and that could skew the whole thing," she said.

Oil Drill

Crude gained 9.4 percent in the past week, and traders say it could keep moving higher. "The purchasing of calls is out of control. Nobody's buying puts," said Ray Carbone, president of Paramount Options. "Strike prices above $95 and $100 are being purchased in volume, all the way out into 2010."

The sinking dollar has been a big factor in oil's move, but Carbone said he's watching other factors as well. "The equity rally. That's important. The return of diesel demand is important, and of course, the dollar," he said.

Carbone said the demand story in diesel is important because if the economy picks up, more trucks will hit the road and diesel demand will improve, supporting higher prices. "We saw draw downs in the distillate inventories this week, bigger than expected. If that continues to happen, that's going to give some momentum and propel the market higher on the demand issue alone. The last time we were at $1.50 to the euro, oil was a lot higher than $75. We were on our way to $147, and that was late spring, 2008."

Jim Paulsen, chief investment strategist at Wells Capital Management, said he thinks rising oil is starting to be a concern, and if it continues to rise it could crimp household spending.

"I don't think it'd be real problematic unless oil zooms to $100, but the problem I have with it is I think one of the biggest contributing factors to the whole crisis was oil doing what it did," (when it moved close to $150), he said. Paulsen said he studied Fed data on households and found the rapid rise in energy costs was a worse increased cost for consumers percentage-wise than debt service.

"I think the thing that really shut the households down was oil going close to $150. It rose substantially more as a percent of disposable income than did the debt service of households. Debt service is a higher percentage, but the changes from a few years earlier was much more dramatic in the energy burden," he said.

Earnings Central

Companies reporting in the coming week include Apple, Texas Instruments, Boston Scientific and Gannett Monday. Caterpillar, Coca-Cola, DuPont, Pfizer, United Technologies, Black Rock, Coach, Lockheed Martin, UAL, Parker-Hannifin, Yahoo and United Health release results Tuesday.

On Wednesday, Boeing, EliLilly, Wells Fargo, Continental Air, Morgan Stanley, Amgen, and eBay report. AT&T, Merck, 3M, Travelers, UPS, Bristol-Myers, American Express and McDonald's are among the highlights Thursday. Microsoft, Schlumberger, Whirlpool and Honeywell report Friday.

— Questions? Comments? marketinsider@cnbc.com

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