Investors to Watch Fed for Interest Rate Cues

With earnings season winding down, investors will look ahead to this week's meeting of Federal Reserve policy-makers for any shift in their interest rate stance that could trip up a rally in U.S. stocks.

Equities are expected to drift higher as earnings keep beating the Street's expectations and a seemingly bottomless pit of money from private equity fuels a steady stream of mergers and acquisitions, also seen lifting share prices.

"There's an enormous amount of money with nowhere to go," said Michael Metz, chief investment strategist at Oppenheimer & Co. "Everywhere you go, between buybacks and private equity, the world of stocks is shrinking and the demand is there."

The Dow Jones industrial average set four all-time closing highs last week while the benchmark Standard & Poor's 500 Index broke through the 1,500 mark for the first time in over six years.

The S&P is less than 50 points from its all-time high of 1,552.92 set in March 2000 at the height of the bubble in technology stocks.

The Dow Jones closed the week up 1.1 percent at 13,264.62, the S&P 500 gained 0.77 percent to 1,505.62 and the Nasdaq Composite Index rose 0.58 percent to 2,572.15.

Of the 408 companies in the S&P 500 that have reported earnings from the first quarter, 279 have beat expectations, or 68.4 percent, according to Reuters Estimates.

Telecommunications equipment maker Cisco Systems Inc. and Walt Disney Co. report earnings Tuesday, and American International Group Inc., the world's largest insurer, reports Thursday.

Driving stocks higher are corporations that have shown an "unprecedented savvy" in managing operations and delivering record profit margins, said Michael Jones, chief investment officer at Clover Capital Management in Rochester, New York.

"Earnings continue to be robust. The growth rate in earnings is slowing but by any measure profitability is at record highs," said Jones, who oversees about $2.8 billion in assets at Clover Capital.

Big U.S. corporations, such as the stocks which make up the Dow 30, are bucking slower economic growth with strong exports and a higher profile abroad. The Dow has risen 23 of the past 26 trading days, the longest streak since 1955, Dow Jones Indexes said.

"The Dow stocks have indicated they can all offset the slowdown in domestic operations with higher demand from overseas operations and greater exports," Metz said.

The Federal Open Market Committee meets Wednesday, when policy-makers are expected to leave the benchmark federal funds rate unchanged at 5.25 percent.

Economic indicators that could drive stock prices this week include reports for April on U.S. producer prices and retail sales, both Friday.

April producer prices are expected to rise 0.6 percent, down slightly from a 1 percent rise in March. Excluding food and energy, producer prices in April are expected to rise 0.2 percent after being reported flat in the prior month, a Reuters survey said.

Retail sales are expected to have risen 0.4 percent in April, down from 0.7 percent in March, Reuters said. Excluding autos, sales were expected to rise 0.4 percent, down from 0.8 percent.

With the number of earnings reports slowing, news to trade on will thin, reducing what investors will mull over, Jones said. Stock prices could fall as "you might start to get some introspective exhaustion," he said.

Friday marked the fifth weekly gain for all three major U.S. stock gauges: the Dow, S&P 500 and Nasdaq.

But stocks cannot go up day after day, noted Sam Rahman, a portfolio manager at Baring Asset Management Inc. in Boston.

"I wouldn't be surprised to see some sort of level of consolidation [this] week or whenever it will be, these things never go up in a straight line," Rahman said.

"But the general trend is up, and there isn't a whole lot of data or issues out there" to offset the trend, he said.