Earnings dominate the week ahead, but interest rates could be a big deal after bond market crushing

  • Earnings are expected from dozens of companies, from consumer giant Procter & Gamble to beaten-down blue-chip General Electric.
  • The market will be watching the quiet move higher in bond yields, now that the 10-year has reached 2.65 percent, its highest level since 2014.
  • An important first reading on fourth-quarter GDP, estimated by some analysts to be over 3 percent for a third quarter in a row, is expected Friday. That could be the best growth pace for a three-month period since 2005.
Traders gather for the IPO of Singapore-based Sea Limited on the floor of the New York Stock Exchange (NYSE) in New York, U.S., October 20, 2017.
Brendan McDermid | Reuters
Traders gather for the IPO of Singapore-based Sea Limited on the floor of the New York Stock Exchange (NYSE) in New York, U.S., October 20, 2017.

A blast of earnings news from companies as diverse as Caterpillar and Netflix could help boost stocks in the coming week, but a bigger story may end up being the quiet move higher in interest rates.

There are also a few important economic reports, including Fridays' durable goods and fourth-quarter GDP. If GDP comes in as forecast, it would be the third quarter in a row of 3 percent growth, a solid and consistent pattern that hasn't been seen since 2005.

As the S&P 500 set a new high Friday, the 10-year Treasury yield also rose above 2.65 percent for the first time since 2014. For the bond market, the sell-off could continue and yields could continue to rise, with the 10-year ready to break out of its longtime range and head toward 2.75 percent or higher.

Stock investors will keep an eye on that yield, which currently is not viewed as moving high enough to disrupt the stock market's advance. If the 10-year's yield does rise rapidly, or get near 3 percent, stocks could be affected, strategists said.

After the jump in yields, investors will be more closely watching Tokyo and Brussels for the outcome of the Bank of Japan meeting Tuesday and European Central Bank meeting Thursday.

"Those two meetings are important. It could ease concerns that there is an imminent shift in either of those central banks' policies. That could take some of the pressure off the dollar and yields," said Marc Chandler, head of fixed-income strategy at Brown Brothers Harriman. The dollar index has lost 1.6 percent so far this month and has spiraled lower over the past year.

The Federal Reserve meets in the following week, on Jan. 30, but no action is expected to be taken at Fed Chair Janet Yellen's final meeting before she hands the gavel to Jerome Powell.

The Fed is much further along in its move away from low rates and quantitative easing. But speculation has picked up that other central banks could be moving faster than expected to unwind easing programs.

The European Central Bank has cut its quantitative easing program in half, and speculation swirls that it will end it altogether. The Bank of Japan, meanwhile, reduced some purchases of bonds, and that triggered all sorts of talk that it would cut back on QE.

Either of those meetings could move global interest rates and currencies. A number of strategists doubt the U.S. 10-year yield will go much higher now, but they see it in an uptrend.

Lee Ferridge, North American head of macro strategy for State Street Global Markets, expects the 10-year to top out at 2.75 percent, where he expects to see a lot of buying interest. Yields move inversely to price.

"When we get to 2.75, then people will start talking about 3 ... 2.75 would be the level to me where the equity market would start to look at it and say it's getting a little high," said Ferridge.

At that level, "I think it would certainly take some of that momentum away. Stocks had a fantastic start to the year, one of the best starts we've ever seen," he said. "I think that sort of momentum would be hard to maintain with yields at 2.75 or above."

The S&P 500 ended the week at 2,810, with a gain of 0.9 percent. The S&P is now up 5.1 percent since Jan. 1.

The markets Friday were little bothered by the prospect that the government could shut down. Ferridge said since the 1970s, the S&P 500 averaged a 0.6 percent decline when the government shut down, but it was actually higher during the last three instances.

By the end of the week, about one-fifth of the S&P 500 companies will have reported. Airlines are expected to report, with United Continental on Tuesday and American Airlines on Thursday. Industrials, defense contractors, consumer giants and financial companies are reporting.

Among blue chips, Procter & Gamble and Johnson & Johnson report Tuesday; beaten-down General Electric reports Wednesday, and 3M and Caterpillar report Thursday.

Global trade will also be in the spotlight in the week ahead, as NAFTA talks get underway again in Canada.

President Donald Trump heads to the World Economic Forum in Davos at the end of the week.

What to Watch

Monday

Earnings: Netflix, TD Ameritrade, UBS, Halliburton, Zions Bancorp, Wintrust Financial, Steel Dynamics

Tuesday

Earnings: Procter & Gamble, Johnson & Johnson, Travelers, Fifth Third, Kimberly-Clark, State Street, United Continental, Capital One, Canadian National Railway, Huntington Bancshares, Total Systems

8:30 a.m. Philadelphia Fed nonmanufacturing

1:00 p.m. 2-year note auction

Wednesday

Earnings: Ford, Abbott Labs, Comcast, General Electric, Novartis, General Dynamics, Illinois Tool Works, Baker Hughes, United Technologies, Ameriprise, Raymond James, F5 Networks, Northern Trust, Stanley Black & Decker, Discover Financial, Ethan Allen, Legg Mason

9:00 a.m. FHFA home prices

9:45 a.m. Manufacturing PMI

9:45 a.m. Services PMI

10:00 a.m. Existing home sales

1:00 p.m. 5-year note

Thursday

Earnings: 3M, Caterpillar, Celgene, LVMH, Biogen, Union Pacific, Starbucks, Intel, Northrop Grumman, American Airlines, Freeport-McMoRan, Alaska Air, Fiat Chrysler, Raytheon, Southwest Air, Sherwin-Williams, JetBlue, Celanese, Intuitive Surgical, Diageo, Western Digital, KLA-Tencor

8:30 a.m. Initial claims

8:30 a.m. Advance economic indicators

10:00 a.m. New home sales

1:00 p.m. 7-year note auction

Friday

Earnings: Honeywell, Colgate-Palmolive, AbbVie, NextEra Energy, Air Products, Lear, Rockwell Collins, Gentex, PolyOne

8:30 a.m. Durable goods

8:30 a.m. Real GDP Q4