Wall Street to Track Earnings, Inflation

The beginning of the third-quarter earnings reporting season takes center stage for U.S. stock investors next week, and what remains a robust profit picture could provide stocks a much needed lift from October's dismal start.

Earnings for companies in the Standard & Poor's 500 Index (search) are expected to have risen by nearly 15 percent from a year ago, according to Reuters Estimates, an expectation that has not been dimmed by the impact of recent hurricanes on the U.S. Gulf Coast.

Among major companies scheduled to report earnings in the coming week are Dow components Alcoa Inc., the world's largest aluminum producer, and General Electric Co. (GE), which is generally considered a barometer of U.S. economic strength. Jeffrey Immelt, GE's chief executive, this week said he was bullish about the economy, calling it "pretty darn good."

Apple Computer Inc. reports its fiscal fourth-quarter resultsTuesday.

"The equity market is going to begin focusing more on corporate earnings and may even focus on the positive benefits of a little bit of economic activity," said Michael Strauss, chief operating officer and chief economist of Wilton, Connecticut-based Communfund.

But with Federal Reserve (search) officials increasingly warning about the potential for higher inflation, strategists also expect investors to be on the lookout for economic data that paints a clearer view about the suspected price buildups after the recent devastating hurricanes.

Strauss added that any comments companies make on costs and pricing would be closely watched since "in next week's inflation numbers, we're going to see the hiccup in energy."

He said airlines are trying to raise prices as are some of the shipping companies. There are also steel price pressures and a number of other building price pressures because of the post-hurricane rebuilding.

"The Fed is a little bit uncomfortable with that," Strauss said.

Among key data for next week is the government's release of its update on consumer price index (search) for September Friday, along with retail sales. On the same day, the University of Michigan (search) is scheduled to release its preliminary consumer sentiment survey for October.

According to a Reuters poll of economists, the U.S. consumer price index is forecast to have risen by 0.9 percent in September, compared with a 0.5 percent gain in August. But stripping out food and energy, the core CPI is expected to have gone up 0.2 percent in September from 0.1 percent in August.

On Monday, U.S. bond markets will be closed for the Columbus Day holiday but the stock markets will be open.

Weston Boone, vice president of listed trading at Legg Mason Wood Walker in Baltimore, said he expected the market to tread cautiously as earnings begin trickling in.

"I would not be surprised to see continued weakness in the market as we head into the earnings season," he said.

"Sentiment on the Street is that the continued high costs of energy — gas at the pumps, home heating oil, natural gas — would not bode well for the short term, " he said.

This week, the three major U.S. stock indexes skidded to multiple-month lows, buffeted in part by a string of hawkish remarks about inflation prospects from Fed officials even as crude oil prices dipped to their lowest levels in two months.

For the week, the S&P 500 fell 2.7 percent, its worst performance since the week ending April 17. The blue-chip Dow Jones industrial average dropped 2.6 percent, its worst run since the week ending June 26. And the Nasdaq slid 2.8 percent, its worst performance since the week ending April 17.

"What's going to drive things over the next several weeks is how third-quarter earnings come out," said Hans Olsen, chief investment officer at Bingham Legg Advisers in Boston.

"My sense is that the high oil prices we've sustained throughout this year are beginning to take hold in the operating costs of a wider swath of U.S. companies.

"October could be a pretty tough month for the market in light of some earnings disappointments," he added.

He said that even with better-than-expected September sales from most U.S. retailers this past week, it was still too early to get a clear reading of how U.S. consumers were holding up.

"It looks like we are not going to have a reprieve from higher interest rates," he said.

Tuesday, the Federal Reserve will release the minutes of the Sept. 20 meeting of the rate-setting Federal Open Market Committee (search). At that September meeting, the FOMC raised the benchmark fed funds rate for an 11th straight time by a quarter percentage point to 3.75 percent.