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Week Ahead: Surprise Surprise—The Market's Found Something to Cheer About

Published: Friday, 23 Jul 2010 | 8:37 PM ET

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By: Patti Domm
CNBC Executive Editor

The not-so-surprising, positive surprises in corporate earnings news could steer the stock market in the week ahead.

Sandra Baker | Photographer's Choice | Getty Images
With the European bank stress tests out of the way, investors may shift focus to what's got the stock market perking up in the last couple of days. That would be the 42 percent jump in S&P 500 profits so far this quarter, combined with cautious, but not scaredy-cat comments from corporate executives on the outlook.

Big oil, including BP [BP Loading... () ] and Exxon Mobil [XOM Loading... () ], joins the list of industries releasing results in the week ahead (see page 2 for more). About 24 percent of the S&P 500 report, including insurer Aflac, aerospace giant Boeing [BA Loading... () ], industrial DuPont [DD Loading... () ] and credit card company Visa.

"My view is the message that's come from earnings season has been very strong," said Barclays Capital's Barry Knapp. "What we've heard from transport companies, the package carriers, like UPS, the rails like UNP, the airlines is that revenues are up a lot. The outlook is good. Guidance is getting pushed higher, and there's no sign of a slowdown in the next quarter."

With more than a third of the S&P 500 reporting so far, 78 percent of the earnings beat estimates and 67 percent of companies have beaten revenue estimates. But this good flow of earnings news will have to fight it out with a moderate stream of economic data, that could disappoint in the coming week.

"The risk reward in the macro numbers next week is pretty good. The earnings are coming in strongly so you have to think we have a little bit of upside here," said Knapp, who heads U.S. equity portfolio strategy.

Goldman Sachs economist Andrew Tilton said the big numbers he's following are Friday's release of second quarter GDP and any industrial data, particularly the durable goods for June. "Collectively there's a lot of information on the industrial situation next week and that will show whether that trend is going to extend or whether what we saw in the ISM is short-lived," he said. The ISM, a measure of manufacturing, was weaker than expected at 56.2, when reported at the beginning of the month.

Economists have been paring back second quarter GDP after a string of softer-than-expected data. Goldman cut its GDP forecast to 2 percent from 3 percent last week.

Tilton said GDP will be more informative than usual because this release will include revisions going back to 2007. "One of the issues that forecasters disagreed with this year is whether employment overshot to the downside," he said. Revisions to GDP, and by extension unemployment, may bring clarity to that.

"Our view is the labor market is terrible, but our view was not a surprise given how bad the economy was," he said.

Jefferies managing director Art Hogan said the market is expecting a 2.5 percent GDP. "If we get a negative surprise, and the market can only assume we only revise the numbers down, that could be bad for the market," he said.

But Hogan thinks earnings news will win out in the next couple of sessions even though revenue growth is still a disappointment for some companies, such as IBM [IBM Loading... () ] in the past week.

"Although it's a robust economic calendar, I don't think there's enough to topple the apple cart so I really think the earnings will take over the news and the market will be fine," he said.

BP sign
Ben Stansall | AFP | Getty Images
BP reports earnings on Tuesday, tipping its hand on the effect its mega-spill has had on the company financially.

Knapp said revenue growth could pick up to about 12 to 13 percent for the S&P 500 companies this quarter, better than the expected 10 percent level. It's currently at 11 percent.

"Only about 8 percent of the energy companies have reported, and that could get the revenue growth up...12 to 13 percent S&P revenue growth is not consistent with a double dip," he said. Analysts had also expected profit growth of 27 percent, but it is running well ahead of that pace so far.

In the coming week, there is also housing data in the form of new home sales Monday, and the S&P/Case Shiller home price index is out Tuesday. Consumer confidence is reported Tuesday, while consumer sentiment is released on Friday. On Wednesday, durable goods and the Fed's Beige Book on the economy are released. Weekly jobless claims are issued Thursday. Friday's reports include the employment cost index and Chicago purchasing managers. The Dallas Fed's survey is released Monday, and the Richmond Fed's survey is issued Tuesday.

The Treasury also auctions more than $100 billion in 2-year, 5-year and 7-year (click here for at-a-glance bond prices) next week.

CONTINUED: One Way Market's Upside 'Could Be Violent'

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