Fed Will Call the Shots on Wall Street

After a blazing 3-month stock market rally, investors will be waiting to see if the Federal Reserve (search) dishes up a single or double dose of rate cuts next week in a bid to shore up sagging U.S. growth.

Wall Street is widely expecting the Fed to cut interest rates by a quarter of a percentage point at its two-day monetary policy meeting on Tuesday and Wednesday, but whether it will opt for a more aggressive half-point cut is up in the air.

Uncertainty about the Fed's intentions, fueled by a couple of dueling newspaper reports, along with possible corporate profit warnings as the quarterly "confession" season heats up, may keep investors walking on eggshells.

"Until we get into the earnings season, there may not be a lot of positive catalysts for the market, and, absent that, some folks may decide to go ahead and take some money off the table," said Rich Nash, chief market strategist at Victory Capital Management.

Stock traders are now searching for solid evidence that the economy is regaining its footing after a heady market rally fueled by expectations a rebound is on its way.

With that in mind, a raft of economic data, including reports on consumer confidence, durable goods, home sales, personal income and spending and first quarter growth, could help give the market some direction in the week ahead.

Stocks have stormed higher in the past three months, lifting the Standard & Poor's 500 index (search) up 24 percent from its 2003 low hit in mid-March.

The gains have also hoisted major market gauges into positive territory for the year. Year-to-date, the Dow Jones Industrial Average (search) is up 10 percent, the technology-packed Nasdaq Composite Index (search) is up 23 percent, and the S&P 500 is up 13 percent.

Wall Street's top bond dealers are unanimous in predicting the Fed's going to trim the 1.25 percent federal funds rate for a 13th time since is starting lowering interest rates aggressively in January 2001.

Questions remain over whether a dramatic half-point cut is in the cards after conflicting articles from two respected Fed-watchers in rival newspapers. The Washington Post on Thursday forecast, without quoting sources, a cut of half a percentage point, while the Wall Street Journal on Friday cited Fed officials saying a more modest quarter-point cut remains on the table.

Many analysts say a cut -- of either magnitude -- will underpin stocks, since it signals the Fed's willingness to give the economy the stimulus it seems to sorely need. But they also say it is unlikely to provide a catalyst for significant gains, given the market's heady run.

"The good news is priced in here," said Jeffrey Kleintop, chief investment strategist at PNC Advisors. "We've come far enough ... Now the fundamentals need to follow what the markets have laid out as the hope for the course of events."

Earnings reports from handful of companies will garner attention, including results from top U.S. drugstore chain Walgreen Co. (WAG), overnight package deliverer FedEx Corp. (FDX), U.S. supermarket chain Kroger Inc. (KR), and investment bank Goldman Sachs (GS). Also on tap are earnings from cereal company General Mills Inc. (GIS) and ConAgra Foods (CAG).

Wall Street will be paying close attention to any hints corporate managements are willing to give about the health of their businesses in the quarters ahead.

Quarter-end "window-dressing," in which fund managers dress up their portfolios with the winning stocks of the past three months and dump the losers, could be another feature of the week, analysts said.

A number of economic reports are likely to catch investors' attention next week as Wall Street searches for signs that consumer spending -- the linchpin of U.S. growth -- will hold strong.

The Conference Board's consumer confidence index (search), due on Tuesday, is expected to show a slight decline to 82.4 in June from 83.8 in the prior month, according to economists in a Reuters survey. The University of Michigan's final consumer sentiment report for June will also be in focus on Friday.

The government's report on personal income and spending, due on Friday, is expected to show both rose slightly in May.

Investors will also watch closely for the government's final take on first-quarter U.S. gross domestic product. Economists polled by Reuters are expecting it to show an increase of 1.8 percent.