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Wall Street Bulls Will Battle Europe and the Economy

Armed with better-than-expected corporate profits, Wall Street’s bulls will do battle with potentially bearish economic and European news in the week ahead as investors await Friday’s April jobs report.

A string of disappointing economic data, starting with the March jobs report, have been a speed bump for stocks in the past several weeks, while investors also fret about new sovereign debttroubles in Europe. Now, the April jobs report looms large, and economists are paring back their expectations to reflect a slower rate of job growth of about 159,000 nonfarm payrolls.

“Jobs are always important, but I still think the big story right now is earnings,” said Ed Keon, managing director and portfolio manager at Prudential Financial’s Quantitative Management Associates.

“A lot of people were really worked up about earnings a few weeks ago, and it looks like we’re getting (profit) growth of about 6 percent, when people were looking for about 2 percent. You’re getting double digits out of industrials and technology, which may be an indicator that the economy is doing better than people think it is and better than the weaker GDPnumber would suggest.”

First-quarter GDP Friday showed growth of just 2.2 percent, below the 2.6 percent expected by economists.

Besides the monthly employment report and other jobs-related data, there are other important releases, including monthly car sales, the ISM manufacturing survey, and retailers’ monthly sales. About a quarter of the S&P 500 companies report earnings, and it will be a diverse group, including GM; media companies, like Viacom and Time Warner; insurers AIG and Allstate, and consumer staples giant Kraft Foods.

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The European Central Bankalso meets Thursday and holds a press briefing afterwards. Spain auctions bonds that day, its first since S&P’s downgraded its debt by two notches to BBB-plus this week.

“If we can get any sort of relative calm out of the euro zone, I think we could trade higher,” said Art Hogan of Lazard Capital Partners.

“We really do have a curious collection of cross currents, and yet the market is still creeping higher. That’s been the case the whole week. We’ve clearly hit a soft patch in the U.S. economy. That’s been the case for three weeks now," Hogan said. "Another piece of the puzzle is that the earnings season, which was supposed to be terrible, is much better than expected,” said Hogan. “But if our chief focus is major concerns about Spain, I think we’ll be choppy.”

Merry Month of May?

The week ahead also includes May Day. The markets are highly sensitive to the historic pattern of “sell in May” and “go away,” particularly since it has held true in the past two years when stocks reached their highs of the year in April.

This year, the market hit highs early in the month of April and subsequently sold off about 4.5 percent. Yet, those losses were nearly recovered by Friday’s close.

The Dow temporarily rose above its 2012 closing high of 13,264 Friday. It ended the week at 13,228, up 1.5 percent for the week and up 0.1 percent for the month of April. Nasdaq, helped by Apple and Amazon, finished the week 2.3 percent higher at 3,069.

The S&P 500 regained the key 1400 level, ending the week at 1403, up 1.8 percent. The 1400 level is near or at a level that a number of strategists have set as a forecast target for yearend 2012. Many of those strategists saw their 2011 targets met by April last year, when the S&P hit 1370. It then traded lower to finish the year dead flat, at 1263.

Jack Ablin, CIO of Harris Private Bank, was one of those strategists. “I’m OK about it but I don’t trust it,” Ablin said of the stock market’s performance now. His year-end target is 1450, and he expects the market to face a lot of bumps on the way there, including worries about slower growth, European debt concerns and the fallout from the U.S. presidential election.

“My inclination, as we move closer to 1450, is to set up to reduce our risk and declare victory,” he said. But he doesn't intend to abandon stocks. “We’re working on a strategy to stay in equities, but to stay in lower risk equities. That way, we can stay in the equity market which, we think, relative to bonds, is table-poundingly cheap.”

Keon said he expects the market to finish the year five to 10 percent higher than current levels. He said Europe does pose a risk, and while it’s possible, it’s unlikely it will trigger a “Lehman like” event.

“Over the last month, we’ve trimmed positions a little bit, but we’re still overweight stocks and risky asset … I still think you’re going to get rewarded for holding risk,” he said.

“Despite political uncertainty, despite all the things we talk about every day, we’ve managed to knock out pretty good (earnings) growth. I think we’ll see growth in the middle to upper single-digit range for the year as a whole. The notion the rally is about to stall as a result of bad earnings is unlikely. The jury is still out on Europe,” Keon said.

Euro Drama

Besides Spain, investors will be watching the buildup to the French and Greek elections, which take place Sunday, May 6.

“Fasten your seat belts,” said Marc Chandler, chief currency strategist at Brown Brothers Harriman. “The socialist is going to win in France, and in Greece, the risk is you get a very fractured, fragmented government.” French President Nicolas Sarkozy is expected to lose the runoff election against Francois Hollande, who opposes aspects of the fiscal compact and supports raising taxes and spending.

Chandler said the briefing Thursday by ECB President Mario Draghi will also be important because Draghi may give more color to his comment about Europe needing a growth pact. “I wouldn’t expect any significant changes” from the ECB, said Chandler. He said after the ECB meeting, his call would be to short the euro into the weekend elections.

Econorama

Friday’s jobs number could also send the dollar lower, if investors think it is weak enough to prod the Fed into easing. Fed Chairman Ben Bernanke this past week made it clear the Fed has no plans for a third round of quantitative easing (QE3) or another bond purchase program; the Fed also raised its economic forecast.

Yet, stock market investors clung to Bernanke's comments that the Fed could do more if it needed to, leaving the door slightly ajar for another easing round. The dollar also weakened on the idea of more easing, with the dollar index closing at a two-month low Friday. The euro edged up 0.2 percent against the dollar, ending the week at 1.32. Bonds also saw buying and the 10-year yield slipped to end the week at 1.931 percent.

Chandler pointed out that the first-quarter GDP number Friday reflected a decrease in government spending, but importantly, consumption picked up. “One of the reasons we had stronger consumption is because more people are working,” he said.

“I think we’re in for a couple of months of softer job data,” said Chandler. “The key becomes the third quarter, as long as we don’t get too much of a slowdown. If Q3 shows continued weakness, if we see a further buildup of inventory … If we see a slowdown in the number of people working and wage growth slows down, then I think we’d get more talk of QE3.”

Keon said he expects the jobs report to be more supportive than negative for the market. “I think we are making progress. I think it’s more likely the economy will surprise on the upside than the downside when you look at the year as a whole,” said Keon. “The consumer sentimentdata we got (Friday) was better than expected and the consumption part of GDP was pretty good. I do actually think we’re getting some traction.”

Besides data in in the coming week, there are also a few Fed speakers, mostly appearing on panels. CNBC’s Steve Liesman Tuesday will be interviewing both Atlanta Fed President Dennis Lockhart and Chicago Fed President Charles Evans at 10:30 a.m. ET Tuesday. They will both be appearing at the Milken Institute conference, as is Dallas Fed President Richard Fisher.

Fed Gov. Daniel Tarullo speaks Wednesday morning in New York, at the Council on Foreign Relations. He also meets in New York with bankers to discuss the recent bank stress tests, CNBC’s Mary Thompson reports.

Investors will also be watching the meetings Thursday and Friday between Treasury Secretary Timothy Geithner and Secretary of State Hillary Clinton with Chinese Vice Premier Wang Qishan and State Councilor Dai Bingguo. Ahead of those meetings, Geithner said China hasn’t done enough to open its economy or allow its currency to appreciate. On Friday, the yuan set a new high for a second straight day.

Monday

Earnings: Anheuser-Busch InBev, Humana, Loews, NYSE Euronext

8:30 a.m. Personal income

9:45 a.m. Chicago PMI

10:00 a.m. Housing vacancies

10:30 a.m. Dallas Fed survey

2:00 p.m. Senior loan officer survey

5:30 p.m. Dallas Fed President Richard Fisher on panel on jobs at Milken Institute conference

Tuesday

Earnings: BP, Pfizer, Avon Products, Chesapeake Energy, Caesars Entertainment, General Growth Properties, Motorola Mobility, CBS, CBOE, Archer Daniels Midland, Foster Wheeler, Marathon Oil, Valero, Boston Properties, Legg Mason, Sirius XM Radio, Thomson Reuters, Foster Wheeler, Automatic Data

April auto sales

10:00 a.m. ISM manufacturing data

10:00 a.m. Construction spending

10:30 a.m. Chicago Fed President Charles Evans, Atlanta Fed Dennis Lockhart CNBC interview

11:00 a.m. San Francisco Fed President John Williams on panel on recovery at Milken Institute conference

12:30 p.m. Fed’s Evans and Lockhart on panel on monetary policy at Milken Institute conference

3:00 p.m. Philadelphia Fed President Charles Plosser on economic outlook CFA Society, San Diego

Wednesday

Earnings: MasterCard, PG&E, CVS Caremark, Time Warner, Comcast, Barrick Gold, Clorox, Marathon Oil, Allstate, Boston Beer, Sunoco, Whole Foods, Visa, Transocean, Green Mountain Coffee, Hertz, Hartford Financial, Devon Energy, HSN, DreamWorks Animation, Murphy Oil, Symantec

7:30 a.m. Challenger job cuts report

8:00 a.m. Fed Gov. Daniel Tarullo speaks on regulatory reform at Council on Foreign Relations, NY

8:15 a.m. ADP employment report

10:00 a.m. Factory orders

12:30 p.m. Richmond Fed President Jeffrey Lacker on economic outlook in Norfolk, Va.

1:30 p.m. Philadelphia Fed’s Plosser on economic outlook at University of California, Santa Barbara

6:30 p.m. Chicago Fed’s Evans on restoring growth

Thursday

Earnings: General Motors, Kraft Foods, AIG, LinkedIn, Apache, Cigna, Cardinal Health, Viacom, Sara Lee, Progress Energy, Hyatt

April chain store sales

7:45 a.m. European Central Bank rate announcement

8:30 a.m. Initial claims

8:30 a.m. Productivity and costs

10:00 a.m. ISM nonmanufacturing

Friday

Earnings: Berkshire Hathaway, Duke Energy, Brookfield Properties, Estee Lauder, Exelon, Spectra Energy, Washington Post, Aon

8:30 a.m. Employment report (April)

11:30 a.m. Chicago Fed’s Evans moderates panel at Chicago Fed on restoring growth and stability

Follow Patti Domm on Twitter: @pattidommQuestions? Comments? Email us at marketinsider@cnbc.com

  • Patti Domm

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

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

  • CNBC's Senior Personal Finance Correspondent

  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

  • Senior Producer at CNBC's Breaking News Desk.