NEW YORK – Stocks should stretch their wings this week as investors' mounting enthusiasm over an economic bounce next year outshines disappointment over dreary earnings and economic numbers.
"We have squeezed all we are going to squeeze out of this market on the way down," said Stanley Nabi, managing director at Credit Suisse Asset Management, which oversees about $110 billion. "Investors are looking beyond the valley. We know the rest of the year is going to be bad. We know the first part of next year is going to be bad. It's not going to come as a surprise anymore."
Stocks clawed higher last week in the face of an unnerving rise in anthrax cases, a steady drip of poor quarterly profits and data painting a bleak economic picture. The broad Standard & Poor's 500 index climbed about 3 percent to 1,105 during the week and surpassed levels posted before the Sept. 11 attacks on the United States.
"There is still skepticism about the lift and about the state of the economy, but analysts tend to look at what's in front of them," said A.C. Moore, chief investment strategist at Dunvegan & Associates.
Corporate earnings are showing the worst drop in profits in a decade — down almost 22 percent — but the flood of third-quarter reports will wind down this week. On the other hand, economic reports that show more signs of a looming recession will pile up on Wall Street.
The market may ward off grim data on jobs, consumer confidence, manufacturing and third-quarter growth this week, but some wonder how long the new-found resilience will last.
"The question is: 'Is the market going to have the fortitude to stick with that optimism through the hailstorm of bad numbers that we are going to get through the next quarter?'" said Jay Mueller, an economist and portfolio manager at Strong Capital Management, which oversees about $42 billion. "We are going to see some pretty scary numbers."
Earnings Season Winds Down
The bulk of the earnings season has passed with more than three-quarters, or about 390, of the S&P 500 companies posting their quarterly earnings, according to Thomson Financial/First Call.
Analysts slashed their expectations throughout the quarter as the economy slowed and lowered the bar for many companies. More than half of the S&P 500 companies have topped Wall Street's expectations, while about 30 percent matched forecasts and the rest missed estimates, the research firm said.
"The bulk of earnings are over and just about every company told you what to expect in the fourth quarter, so it's not going to be a surprise," Nabi said. "The companies have been saying, 'We will have a miserable fourth quarter.'"
Companies in the S&P 500 are expected to post a 21.8 percent drop in profits for the third quarter, the biggest fall since 1991, according to First Call. Analysts are forecasting a 15.5 percent drop in earnings in the fourth quarter and a 4.4 percent decrease in the first quarter.
But in the second quarter of 2002, the trend will reverse — for the better. Earnings are expected to grow in the second quarter, with analysts predicting a 10.1 percent increase versus a year ago, the research firm said.
Most corporate heavyweights have posted their results, but a few giants are still expected. Drugstore chain CVS Corp., consumer products company Procter & Gamble Co., phone company Verizon Communications, United Airlines' parent UAL Corp. and insurance company CIGNA Corp. are slated to release results this week. Even if earnings and sales are worse than expected, the market is expected to trend higher as investors look ahead.
"When the recovery comes, I think it will be a more robust recovery simply for the fact that we are going to have pent-up demand," Mueller said. "We are going to have people deferring consumption. Then when they make up that consumption a couple of quarters from now, we will have a surge of growth."
Economic Data Floods Wall Street
Next week is loaded with data that will shed more light on how the economy is holding up. Much of the data will reflect the damage from last month's attacks that killed more than 5,000 people, so dismal numbers will come as no surprise.
"Economic data reflects the present and the past as opposed to the future," Moore said. "Markets look to the future."
The Conference Board will release its reading on consumer confidence on Tuesday. Confidence is expected to drop to 95.6 in October from 97.6 in September. Confidence in September suffered its largest one-month drop in more than 10 years, but the survey captured just a part of the shock from Sept. 11.
The Commerce Department will release its "advance" or early estimate of third-quarter Gross Domestic Product, the broadest measure of the nation's economic health, on Wednesday. GDP is expected to contract 1.0 percent, according to a Reuters poll, versus growth of 0.3 percent in the second quarter.
A contraction in GDP could prove ominous. A recession, which the nation has not experienced since 1990-91, is loosely defined as at least two straight quarters of falling GDP.
"Whether or not it's an officially defined recession is pretty irrelevant," Mueller said. "We have all the symptoms and have had the symptoms for some time."
The Commerce Department is slated to release its report on personal income and consumption for September on Thursday. Personal income is seen rising 0.1 percent in September, according to a Reuters poll, after remaining flat in August.
Personal consumption is expected to slip by 0.9 percent, after increasing 0.2 percent in August, the poll showed. Consumer spending is closely watched by economists because it makes up two-thirds of U.S. economic activity.
The National Association of Purchasing Management will post its monthly index of manufacturing activity — around one-sixth of the service-sector dominated economy — on Thursday. Economists polled by Reuters expect a reading of 44.3 in October, below 47 in September. A reading under 50 indicates manufacturing activity is contracting. The NAPM index has been under 50 for more than a year.
The Labor Department is set to release October jobless numbers on Friday. Analysts expect the number of workers on payrolls plunged by 289,000 in October, from 199,000 in September. The unemployment rate is expected to rise to 5.2 percent in October from 4.9 percent in September. The data for September showed the job market weakened even before the attacks.