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Week Ahead: Markets Look to Economy After Earnings Bounce

Published: Friday, 30 Jul 2010 | 8:16 PM ET

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By: Patti Domm
CNBC Executive Editor

Economic reports on jobs, manufacturing and the consumer could be what trips up stocks in the week ahead, deflating some of July's 7 percent gain.

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

More than 100 of the S&P 500 companies report earnings. Investors may, however, pay more attention to any other measure that casts light on the strength of the economy or the consumer, including Tuesday's important monthly auto sales. The July employment report, released Friday, is the most important economic report.

"We're going to lose that catalyst we had, which was better than expected earnings," said Jefferies managing director Art Hogan. "The problem is we've run out of steam."

"We probably will have more inclination to be concerned about the pace of the economy and will trade off on it," said Hogan. "...If we're shifting our focus to economic data versus earnings, the tendency of that has been to be a negative catalyst rather than a positive catalyst."

The S&P 500 companies reporting so far have seen quarterly profit increases of 45 percent on average. Of those companies, 75 percent topped earnings estimates and 64 percent beat revenue expectations. A mix of consumer, media, insurers and financial companies dominate the coming week's calendar, and the companies reporting include Procter and Gamble [PG Loading... () ], Kraft [KFT Loading... () ], Time Warner [TWX Loading... () ], News Corp [NWS Loading... () ], MasterCard [MA Loading... () ] and Berkshire Hathaway [BRK'B Loading... () ]. (See the full earnings calendar here.)

Stocks in the past month have seen an earnings bounce, as they struggled against a patch of weaker economic reports. The market was nearly flat Friday, overcoming an initial sell off after second quarter GDP of 2.4 percent disappointed some investors and sent economists to work adjusting their second half forecasts.

Mark Zandi of Moody's Economy.com is one of those looking to revise his third quarter GDP forecast, and he may trim it to under 2 percent. "One very big concern was a very large contribution of inventories to Q2 and that sets us up for a soft Q3. That's consistent with the idea the economy is growing but still below trend, and that gets to the employment report of next week," he said.

Jetta Productions | Getty Images

Zandi expects a decline of 50,000 non farm payrolls for July, including the elimination of 150,000 government census workers. He expects to see private payrolls grow by 100,000. In June, the economy added 41,000 non farm payrolls.

Stephen Stanley, chief economist at Pierpont Securities, expects a decline of 100,000, including a reduction of about 150,000 census workers. He said some consumer driven data in the coming week may show some signs of improvement.

"June was clearly a very soft month for the economy. My sense is July is better. The reports on auto sales are going to be up for the month...The weekly numbers suggest consumers were spending at the mall again," he said.

Whither Stocks

The Dow, up 7 percent for the month, ended up just slightly on the week, gaining 41 points to 10,465. The S&P 500 was up just 1 point for the week, to 1101, but it is up 6.9 percent for the month. The Nasdaq was up 14 points for the week, to 2254, and it has a 6.9 percent gain for the month. Materials shares were the best performers in July, up 12 percent, followed by industrials, up 10 percent. The worst performing major S&P sector was health care, up just 1.3 percent.

"The market's volatile and that's going to continue to be the case. I don't think we're up, up and away. Earnings season has been good generally, but not as good as last quarter," said Stuart Freeman, chief equity strategist at Wells Fargo Advisors.

"We think we're going to see more up and down, up and down volatility. It's possible we move a little higher into the late earnings season, but it's possible we come down in the fall," he said.

Freeman said unlike last year when the market was in a strong recovery, stocks are likely to respond in a more traditional way to seasonal factors and could face a choppy September and October.

"We would expect it to be volatile just because it's a mid-cycle election year, which often causes some consternation and volatility in the market," Freeman said. He expects the market to rise once again after the election is over.

CONTINUED: 'Important Period of Risk'

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