The promise of a decent fourth-quarter earnings season and another week of improving U.S. economic data could provide a tailwind for stocks.
However, the European sovereign debt crisis is like a dark cloud, and a new round of sovereign issuance in the coming week from Portugal, Italy and Spain could keep global financial markets on edge.
"Corporate America has been playing the same game now for at least 10 quarters in a row. They set the bar where a three-year-old could get over it, then Wall Street dutifully follows the guidance and they beat every quarter. Until it stops happening, my guess is everybody's' numbers are too low."
Alcoa will be the first Dow stock to report earnings for the quarter, when it releases numbers after Monday's bell. Other big earnings in the coming week include JPMorgan Chase and Intel. There is also a heavy calendar of economic reports, including trade data and December retail sales reports. On Tuesday through Thursday, the Treasury auctions about $65 billion in notes and bonds.
January has started off on a mostly positive note for stocks, with the Dow gaining 0.8 percent to 11,674 in the first week of the year. The S&P 500 rose 13, or 1.1 percent to 1271. Treasury yields were slightly firmer on the week, with the 10-year at 3.329 percent.
"There's nothing in our work to discourage us from the bullishness we felt last year," said Richard Bernstein, CEO of Richard Bernstein Capital Management. "What's very interesting is that a growing number of our earnings indicators and profits indicators are turning more positive. What it signaled initially was easy comps (comparisons to prior year earnings).
"It looks now like we're heading for a period of not easy comps, but true growth. Along those lines, in the last reporting period, 53 to 54 percent of companies reported revenue surprises in the last quarter. Everybody still thinks this is a story of cutting costs. Something else is going on now," he said.
Analysts expect earnings, excluding the financials, grew at about 11 percent for the S&P 500 companies in the fourth quarter. With financial companies included, that number jumps to 32 percent.
"Corporate America has been playing the same game now for at least 10 quarters in a row. They set the bar where a three-year-old could get over it, then Wall Street dutifully follows the guidance and they beat every quarter. Until it stops happening, my guess is everybody's' numbers are too low," said Steve Massocca, Wedbush Securities managing director.
Besides earnings, economic news should helps stocks. "I think January will be a good month. February and March have to be determined, but I think January is going to be a good month, much like December was a good month," he said.
Goldman Sachs strategists Friday raised their outlook for the S&P 500 for 2011 to 1500, from 1450, based on the prospect of strong earnings. They also raised their earnings target for the S&P to $96 per share, which they note tops the previous high of $91 in 2007.
"We forecast that at year-end 2011 the nominal size of the U.S. economy will be 5 percent larger than today, the level of forward EPS will be 11 percent higher, the P/E will have expanded by 8 percent, or 1 point, and S&P 500 will be 19 percent higher," they wrote in a note.
Goldman's stock strategists are now at the high end of Wall Street forecasts for stocks for this year, but many strategist are bullish.
Bernstein said the bullishness among Wall street strategists reflects a second phase of the bull market, where investors become accepting of the move higher after a period of doubt. He said the same is evident in the inflows into equities mutual funds, positive for a second week in a row after a long period of outflows.
"Among the sell-side strategists, no one is predicting a new high on the S&P this year...I think that's because they are accepting what's going on but not to the point where they believe it's sustainable. There's still an immense fear of double dips and sovereign debt issues, and the myriad of concerns we still have," Bernstein said.
Stocks took in stride a disappointing monthly jobs report Friday, which showed non farm payrolls gained 103,000, well below most Wall Street forecasts, but better than November's revised 71,000. Yet economists still believe, the jobs picture is about to change as U.S. economic news continues to improve.
"I think as we go through the year, I think people are going to be pleasantly surprised at the improvement in the labor market in the next 12 months. I don't think we're going to see the labor market is strong, but it could improve more than people think," Bernstein said.
The dollar had its best week since mid August, gaining 3.6 percent against the euro, which skidded to 1.2910 on snowballing worries about the sovereign situation. At the same time, commodities were highly volatile with gold dipping 3.7 percent to $1,368.50 per ounce. Silver lost more than 7 percent, and copper slumped 3.7 percent. Crude oil slid 3.7 percent for the week, falling to about $88 per barrel.
Spreads on some European sovereign debt were at near record wides to German government debt this past week, as markets worried about the financing ability of the weaker sovereigns. Another troubling factor was a European Commission proposal that would allow regulators to write down senior bank debt of failing banks.
Portugal's six-month bill auction Wednesday commanded a high yield of 3.686 percent, and that has investors concerned about the prospects for this Wednesday's auctions of longer-dated Portuguese debt.
"I think that so far it's a European phenomena. It hasn't really spilled over to the U.S. I think there's enough traction in the economy with fiscal and monetary stimulus," said Brown Brothers Harriman chief currency strategist Marc Chandler. "If anything, if the European crisis deepens, money will flow into the U.S. Treasurys, driving down rates."
Mark Zandi, chief economist at Moody's Economy.com said European sovereign issues will continue to cause concern until regulators take action, such as expanding their bail out fund and buying up more sovereigns. "Probably the most important thing they they've got to do is they're now in another round of bank stress testing. They've got to be more transparent. Clearly, the first stress test was not stressful," he said.
Zandi does not expect the European sovereign situation to become a concern for the U.S. economy unless it shakes financial markets, particularly stocks. "Our stock prices fell 14 percent in the wake of the first round of European stress and that was the main contribution to the slowdown in our economy. If our stock market is able to digest it, then we'll be ok. The trade linkages are small. It has to be something that undermines equities and confidence," he said.
"On the list of things to worry about, I put it at number two," he said. Number one on his list is the continued weakening in housing prices, which he says could slide another five percent.
Zandi said he is focused this week on December retail sales data, reported Friday, and trade data. "They're the things that will matter most to overall growth, so those are the two key numbers," he said.
China's trade data is reported Monday. In the U.S., wholesale trade for November is reported Tuesday, import prices for December are Wednesday and international trade for November is Thursday. The Fed's beige book is released Wednesday afternoon.
There is also inflation data, when producer prices are reported Thursday and consumer prices are reported Friday. Weekly jobless claims are released Thursday. Friday's data also includes industrial production, consumer sentiment and business inventories.
Besides Alcoa, Apollo Group reports earnings Monday afternoon. Lennar reports Tuesday morning, as does Supervalu. Chevron provides interim results after Tuesday's market close.
Shaw Communications reports Thursday morning, and Intel reports after the close Thursday. JPMorgan Chase reports earnings Friday morning.
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