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Week Ahead: Earnings and Economic Reports Tell Tale of Recovery

Corporate America should begin to see its first quarter of double-digit revenue growth in nearly two years, as earnings season gets underway in the week ahead.

Alcoa , Intel , JPMorgan Chase , Google , AMD , and General Electric are among the companies reporting first-quarter earnings this week.

"Last quarter we saw a lot of beats. I think we'll be in the same ball park. We're looking at growing evidence the economy is on better footing," said Ed Keon, portfolio manager at Quantitative Management Associates. Last quarter, 72 percent of the companies in the S&P 500 beat analysts' earnings estimates, according to Thomson Reuters.

New York Stock Exchange (NYSE)
Oliver P. Quilla for CNBC.com
New York Stock Exchange (NYSE)

"It's hard for analysts to build the macro picture into their earnings numbers. At the beginning of a recovery, they tend to be too conservative. At the beginning of a recession, they tend to be too optimistic," Keon said. He said the consensus view is for earnings growth of around 30 percent. "My guess is it'll be something better than that."

Citigroup chief U.S. equities strategist Tobias Levkovich also expects some knock out earnings reports. "I think earnings are going to look very strong...It's going to be a combination of cost cutting and top line revenue growth," he said. "The operating leverage in businesses is usually quite dramatic at turning points."

The coming week has a heavy calendar of economic data -- from international trade, to retail sales and industrial production . All of that should provide a better look at how the economy performed in the first quarter. Another highlight will be Fed Chairman Ben Bernanke's Congressional testimony on the economy Wednesday.

The Greek debt crisis will stay in focus, as speculation swirled in markets Friday that there could be a weekend bailout. China and its move to let its currency float is also dominating market chatter, as President Hu is expected to join other world leaders at a nuclear summit hosted by President Obama in Washington. China also releases GDP and other indicators on Thursday.

"I think the theme next week is further signs of recovery and a broadening out of those signs," said Deutsche Bank Joseph LaVorgna.

In the past week, there were a number of positives that suggest the economy may be a bit stronger than some economists expected. One of those was strength in the ISM nonmanufacturing survey, as well as wholesale inventories. Chain stores also reported better than forecast sales for March.

"I actually think the scope for the biggest surprise will be in international trade and inventories," said LaVorgna of the coming week's data. His current GDP forecast is 4.5 percent for the first quarter. "It just seems to me that the inventory numbers with the trade will be more important than some of these other figures in terms of how GDP plays out in Q1."

J.P. Morgan economist Bruce Kasman, in a note Friday, said for the first time since last summer, J.P. Morgan is raising its outlook for global growth. He noted that his first quarter U.S. GDP forecast of 4 percent is at risk of being too low. He expects March retail sales, reported Wednesday, to show that consumption is gaining momentum.

One report in the past week that was not encouraging was the weekly jobless claims data, which showed an unexpected increase of 18,000 to 460,000. Economists say there needs to be a real turn in the employment situation in order for the economy to heal, and the question is when will the stronger corporate profits result in hiring.

Dow 11,000

The Dow in the past week crossed 11,000 for the first time since Sept. 29, 2008. It finished the week at 10,997, with a 70 point, or 0.6 percent gain. The S&P 500 was up 16, or 1.4 percent at 1194, and the Nasdaq gained more than 2.1 percent to 2454. The S&P energy sector was the best performer, gaining 1.1 percent, followed by the telecom and consumer discretionary sectors, both up 0.8.

Nymex crude for May delivery gained $0.05 per barrel this week, or 0.06 percent to $84.92.

Treasury prices rose on the week, pushing yields lower after the 10-year yield topped 4 percent on Monday. The 10-year finished the week with a yield of 3.890 percent, and the 2-year was unchanged, at 1.072 percent. The dollar lost 0.03 percent against the euro this past week, despite volatility around Greek debt worries.

Marc Chandler, chief foreign exchange strategist at Brown Brothers Harriman, said he thinks the speculation about a Greek bail out over the weekend will prove false, as Greece has enough financing in place for April. "I don't think we've reached the point where their feet are on the fire, and they've got to do something now," he said.

Are We Near the Top?

Whither Stocks

Talk to any group of traders, and you'll hear very different opinions about how much more the stock market can gain before a major tumble. Some see Dow 11,000 as a signal that the top is near, and that earnings season will be a reason to sell on the news. Others say earnings momentum will continue to drive the market higher, especially now that the economy seems to be picking up.

Levkovich said he thinks the market still has a ways to go, but it could hit a series of speed bumps around the middle of the year. One negative may be the U.K. election in May, which could result in a hung parliament that would stall policy in the heavily indebted nation. Around the same time, the Fed may be ready to remove the language in its statement that it plans to hold rates extremely low for an "extended period."

"As we get away from mid-year, the focus will be away form Q1 and Q2 to what does 2011 look like. We know at the end of the year the Bush tax cuts expire," he said.

"There's going to be at some point, as we move towards summer, where the focus is on the midterm election," he said. He also said if Treasury yields continue to drift higher, that could begin to be a dampener for stock performance.

But for now, he says the stock market can continue to rise. "I don't think investors have believed. I think they've been fairly skeptical because they worry about all these big issues. We're starting to see a kind of grudging acceptance. If the hedge funds are covering shorts, they're feeling performance pressures, and they're being dragged in by retail companies telling us business is okay, and by industrial manufacturers telling us sales will be up.

They're kind of being pulled into it. I think some of the skepticism is starting to diminish. They are starting to believe grudgingly, as opposed to believe wholeheartedly," he said.

Levkovich said he expects the earnings comments from companies to also be very positive this quarter.

Keon said companies that have a large exposure to Europe may see a hit from the decline in the euro in the first quarter, but that should be largely balanced by gains by other currencies in emerging markets and Canada.

Sectors that should show the best outperformance include technology, consumer discretionary, and energy companies, due to higher oil prices, he said.

The S&P 500 is expected to show average revenue growth of 10 percent, a level last seen in second quarter, 2008, according to Thomson Reuters data. Revenue growth in the fourth quarter was a better-than-expected 8 percent.

The energy sector is expected to see the best revenue growth, with a 33 percent increase. Materials sector revenues are expected to be up 20 percent, and technology is seen up 16 percent. Consumer discretionary revenues are expected to rise 11 percent. Telecoms are expected to see flat revenues, and industrials and financials are expected to show just a 1 percent gain, according to data provided by Thomson Reuters.

Profits for the S&P 500 are expected to rise by 37 percent, led by sharp gains in financials, materials and consumer discretionary companies. Without the financials, S&P 500 earnings are expected to be 27 percent higher.

Earnings Central

The earnings calendar contains some heavy hitters, but it is still relatively light this week. Earnings are expected from Alcoa, after the bell Monday. Intel and CSX report Tuesday. JPMorgan Chase and Yum Brands report Wednesday. PPG, Google, and AMD report Thursday, while Bank of America, GE, Gannett and Mattel report Friday.

Econorama

Economic reports in the coming week include international trade and import prices Tuesday. The NFIB small business survey is also released that day. On Wednesday, there's CPI, business inventories, and the Fed's Beige Book, in addition to retail sales. Thursday's data includes weekly jobless claims, the Empire State survey, Philadelphia Fed survey, industrial production, and the Treasury's international capital flow data. The National Association of Home Builders survey is released Thursday. On Friday, there are housing starts and consumer sentiment.

The Fed is out in force in the coming week, with a multitude of speeches from many of the regional bank presidents. Besides his testimony before the Joint Economic Committee Wednesday, Bernanke speaks Tuesday evening in Washington. Richmond Fed President Jeffery Lacker speaks on the economy Tuesday and again on Wednesday, and then on Thursday at the Credit Markets Symposium in Charlotte.

Fed Governor Daniel Tarullo speaks Tuesday at the Council of Institutional Investors Meeting. Fed Governor Kevin Warsh speaks Wednesday at the Levy Economics Institute of Bard College Minsky Conference in New York. Cleveland Fed President Sandra Pianalto speaks at the same conference Wednesday, and St. Louis Fed President James Bullard speaks there Thursday. Kansas City Fed President Thomas Hoenig speaks there Friday, as does Warsh.

San Francisco Fed President Janet Yellen is speaking to Financial Executives International in San Francisco Thursday on the outlook, and Atlanta Fed President Dennis Lockhart speaks in Pensacola on the outlook Thursday. Dallas Fed President Richard Fisher speaks on the financial crisis in Washington Thursday.

Questions? Comments? Email us at marketinsider@cnbc.com

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  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

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