Week Ahead: Earnings May Once More Rule the Stock Market

It's back to basics for stocks in the coming week, as a tidal wave of earnings overwhelms economic reports and shifts investor focus temporarily to the health of corporate balance sheets.

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More than a fifth of the S&P 500 report, including financial, tech and industrial companies, like American Express , Apple and Boeing . There is also a steady stream of Fed officials speaking every day, keeping the markets focused on the prospects for more Fed easing.

The weakening dollar will also stay a driver, and foreign exchange traders are watching for comments from central bankers and finance ministers meeting in Korea at the end of the week, ahead of the November G-20 meeting.

"We might just get fundamental reasoning in the market place, as we get a look at earnings," said Jefferies managing director Art Hogan. "...how much good news is already priced in? Are we pricing in QE (quantitative easing)? Are we pricing in midterm elections? Or are we pricing in earnings growth? The last one is what we're going to find out next week."

The Dow in the past week gained a half percent to 11,062, and the S&P 500 gained 11 points, or nearly 1 percent to 1176. The Nasdaq, boosted by a tech rally, climbed 2.8 percent to 2468. Banks were the week's losers, dragging the S&P financial sector down 2.4 percent for the week, on worries the mortgage crisis will bite into bank profits.

The big banks reporting, include Citigroup on Monday; Bank of America Tuesday and Wells Fargo Wednesday, following on J.P. Morgan's report this past week. Bank stocks started to tank after 50 states launched an investigation into foreclosure practices. But the major banks were also hit by concerns that they could be on the hook for problems in the securitization market, where the pooled mortgages may not have been exactly what investors were promised.

"It's the dark cloud that is going to hang over the sector until we get some clarity," said Hogan. "Quite candidly, you may look at these banks, like Citigroup, and when they report they may have fine numbers, but you may not get any lift because you still have this great unknown."

Hogan said financials are expected to show the biggest earnings gain of any sector this quarter. The S&P 500 financials are expected to be up 70 percent, because of last year's depressed results. The entire S&P 500 is expected to be up 24 percent over last year's third quarter.

Jack Ablin, chief investment officer with Harris Private Bank, said he increased his equities holdings in the past couple days, in part because of earnings. "I was concerned that analysts' estimates were too high. I thought we'd get preannouncements. We didn't get much, and it said to me companies are prepared to beat," he said.

Ablin said valuations and momentum made him more bullish on stocks.

"I can't stand here and tell you we're at the precipice of a multi-year bull market. I think that as long as we've got stability, then the cheap valuations in stocks should sustain. There are obviously a couple of wild cards. One I think this quantitative easing is probably the biggest financial experiment in the history of the Fed. We think we know what will happen. We have no idea how much it takes. We don't know the cause and effect, and we don't know the timing," said Ablin.

QE2 Set to Sail

Quantitative easing promises to stay in the spotlight, ahead of the Fed's Nov. 2 and 3 meetings. Fed Chairman Ben Bernanke, in a much anticipated speech Friday, made the case for more Fed easing to help boost the economy. He said inflation is below the Fed's targeted 2 percent, and the economy is too sluggish to create jobs.

Fed watchers believe the Fed will likely restart a program to buy Treasury securities, putting more money into the system and theoretically pressuring lending rates and reflating asset prices. The dollar has seen a fairly dramatic decline since the Fed first started seriously talking about easing in late August, and since then, commodities and equities have risen.

To Ablin, this run in commodities has been good and he expects it to continue. "We're still maximum overweight. We put the pedal to the metal in commodities. We got in a little early but we're hanging in with it. While there are certainly some fundamental arguments for a stronger dollar, we think the trend is going to be for a lower dollar," he said.

Robert Sinche, global head of foreign exchange strategy at RBS, said too much of a run up in commodities prices would not be a good thing. "I'm a little concerned the Fed has gotten themselves into the mindset that inflation is good...If they want to keep looking at the core, they have a problem in that people don't shop at the core," said Sinche.

"The purpose is not to create inflation but to create demand growth and employment growth. To generate inflation for the sake of inflation...that's like a tax," he said.

Sinche said the dollar's decline against the euro may be about to stall. The dollar finished the week 0.3 percent lower against the euro, at $1.3976. "This is the second time the euro dollar ventured above 1.40 and it's had a difficult time holding up there. You could be setting up the stage for some stabilization in the dollar," he said.

Another indicator may be a possible bottoming in U.S. interest rate expectations, he said, noting the five-year swap rate backed up 11 basis points this week. He said he will be watching European data as a catalyst for euro/dollar next week. Germany's ZEW business survey is released Tuesday; euro zone PMI is released Wednesday, and the German IFO index Thursday.

'Market Is Booking Some Profits'

Stocks in Bondage

David Ader, chief Treasury strategist at CRT Capital said the equities market is in some ways taking its cues from the bond market on quantitative easing, and that it may show some concern if bond prices continue to weaken. Bonds lost ground this week after a series of weak auctions. The 10-year was yielding 2.571 percent late Friday.