NEW YORK: US stocks could struggle to stay close to nearly five-year highs next week as worries mount about third-quarter earnings and the market appears primed for a pullback from recent stimulus-driven gains.
A bevy of economic reports, including durable goods orders, will grab attention, particularly after the Federal Reserve unveiled its plan on September 13 for a third round of aggressive stimulus to help revive the flagging U.S. economy.
While the action ignited a rally in stocks, analysts have worried that it may suggest the U.S. economy is in worse shape than many had feared. To be sure, stocks are at lofty levels and are likely to attract investors hoping the market will ride out the year on a positive note. The Dow Jones Industrial Average and the benchmark Standard & Poor’s 500 index remain close to highs not seen since December 2007. The S&P 500 is up 16.1 percent since the end of 2011.
“I think the market certainly is ripe for a pullback. But whatever the pullback, it’s going to be rather shallow,” said Peter Cardillo, chief market economist at Rockwell Global Capital, in New York. “Any disappointment in key economic data that would reverse the market’s feeling the economy has stabilized, I think could trigger a 2 to 4 percent pullback,” he added.
Some of that move was seen this week in stocks, which posted slight losses for the week. The S&P 500 slipped 0.4 percent for the week. The Dow industrials and the Nasdaq each finished the week down 0.1 percent. Besides August durable goods orders, data on personal income and spending is due next week, as well as new home sales and the final read on US Gross Domestic Product for the second quarter.
Housing data has been surprisingly strong in recent months and homebuilder shares have experienced massive gains. The PHLX housing sector index is up 62.3 percent since December 31. But that strength has been offset by worrisome data on U.S. manufacturing, which had been among the economy’s strongest sectors. The stubbornly high US unemployment rate also has kept a damper on Wall Street’s mood.
Profit warnings from such high-profile US companies as FedEx helped cement the view this week that third-quarter results could be a drag on the market. “We’ve had some pretty negative pre-announcements, and those announcements for this time frame have been a little more than we’ve had in the past,” Cardillo said.
Estimates for S&P 500 companies’ third-quarter profits have fallen sharply in recent months, and earnings now are expected to drop 2.2 percent from a year ago, according to Thomson Reuters data. Outlooks for the third quarter are at the most negative since the third quarter of 2001, the data also showed. The negative-to-positive ratio for the upcoming earnings period stands at 4.3 to 1. Third-quarter earnings aren’t expected to start in earnest until after the second week of October, when Alcoa is expected to kick off the reporting period. reuters
