NEW YORK – Volatility could be the name of the game this week for the U.S. stock market with the earnings machine running at full tilt and the rising conflict in the Middle East.
So far, second-quarter earnings are shaping up stronger than expected, despite disappointments from some big names in the technology sector. If more strong earnings reports flow in, that could coax some investors back into the stock market, analysts said.
The wild card, though, is the Middle East.
Oil ended the week above $74 a barrel as Israel's army called up reservists and launched small-scale raids in Lebanon in an effort to stop Hezbollah rocket attacks.
The U.S. economy's health will get more scrutiny from Wall Street this week. Major indicators on tap include existing home sales, consumer confidence, durable goods orders, new home sales and second-quarter gross domestic product.
"The story is going to continue to be earnings and the Middle East," said Fred Dickson, market strategist at D.A. Davidson & Co. in Lake Oswego, Oregon.
Dickson pointed out that "a few more than expected companies have been lifting earnings guidance, so that's providing an injection of some positive energy into the market."
Nevertheless, stocks fell Friday, wrapping up a volatile week after personal computer maker Dell Inc. warned of a shortfall in quarterly earnings and revenue. The fighting in the Middle East also cast a pall over the market's mood.
For the week, the blue-chip Dow Jones industrial average rose 1.2 percent and the Standard & Poor's 500 Index gained 0.3 percent, while the Nasdaq Composite Index slid 0.8 percent. For the Nasdaq, it was the third straight losing week.
"We're seeing a high degree of investor sensitivity to the situation in the Middle East," Dickson said. "Very few clients seem interested in exploring stock bargains ... and they have not forgotten the market meltdown of 2000 and 2001. Their fear is the Middle East will trigger a similar selling pattern."
Thousands of Lebanese civilians have fled their homes, fearing Israel will invade, while a massive evacuation of Americans and other foreign citizens from Lebanon to Cyprus and Turkey has continued.
The conflict between Israel and Lebanon has driven oil prices higher. At Friday's close, U.S. crude oil for September delivery settled at $74.43 a barrel. A week ago, crude briefly hit a record $78.40 — the highest price since the New York Mercantile Exchange began trading oil futures in 1983.
A RALLY'S FAST FADE-OUT
Last Wednesday, Federal Reserve Chairman Ben Bernanke touched off an explosive stock market rally when he told the U.S. Senate Banking Committee that he believes core inflation will moderate in the coming quarters. His remarks suggested that the Fed may be nearly done with its two-year cycle of raising interest rates.
Bernanke's comments drove the major U.S. stock indexes up almost 2 percent on Wednesday, giving the blue-chip Dow average its second-best day of the year.
The euphoria did not last long. After flying high on Wednesday, stocks came back to earth and finished lower on both Thursday and Friday.
"The rally in the wake of Federal Reserve Chairman Bernanke's testimony reflected short covering that did not attract any follow-through buying," said Chris Burba, short-term market technician at Standard & Poor's in New York.
"In order for the market to achieve gains in the near term," Burba added, "institutions need to start accumulating and there are no signs of this right now."
Earnings expectations for the second quarter have climbed recently as Reuters Estimates now projects S&P 500 earnings grew 10 percent in the second quarter, up from an expected 9.2 percent the previous week.
"We're going to go back to watching the parade of earnings, and we'll hopefully see some companies guide a little bit better than Dell," said Todd Clark, director of stock trading at Nollenberger Capital Partners in San Francisco.
This week, drugmakers Merck & Co., Schering-Plough Corp.and Bristol-Myers Squibb Co. (BMY) will report quarterly results. Investors may expect strong earnings from the health sector after biotechnology giant Amgen's quarterly results beat estimates last week, Dickson said.
The energy sector, riding high on record oil prices, may lift the stock market this week. Exxon Mobil Corp., (XOM) the world's largest publicly traded oil company, and rival ConocoPhillips will report second-quarter earnings.
Investors will get a feel for the consumer's mood when earnings are reported this week by Kraft Foods Inc., Amazon.com Inc. and General Motors Corp.
HOME SALES AND GDP
Wall Street, already concerned about the cooling of the once-hot housing sector, will note two reports this week:
— Tuesday, a report on existing home sales is expected to show a drop to an annualized pace of 6.58 million units in June from a pace of 6.67 million in May, according to economists polled by Reuters.
— Thursday, a report on new home sales is forecast to show a decline to a seasonally adjusted annual pace of 1.160 million units from 1.234 million units in May.
Friday, the Commerce Department's estimate of growth in second-quarter gross domestic product is expected to show that the U.S. economy grew at an annual pace of 3.0 percent in the second quarter, down from 5.6 percent in the first quarter.
Rounding out the week's packed economic data calendar will be the Conference Board's July consumer confidence index, due Tuesday, pegged at 104.0, down from 105.7 in June, and the Fed's "Beige Book" report on Wednesday, a look at the regional economies served by the 12 Federal Reserve district banks.
On Thursday, the government will release a report on U.S. durable goods orders for June, forecast up 1.8 percent after a drop of 0.2 percent in May.
On Friday, Wall Street will get the University of Michigan's final reading on its July consumer sentiment index. The forecast is 83.0, down from 84.9 in June.