NEW YORK – Value investors are expected to buy downtrodden stocks this week. But the broad market will end flat or edge lower on resurfacing doubts about a swift end to the U.S. recession and a turnaround in corporate profits.
"The market will go a little lower sometime" during the week, said Stanley Nabi, managing director at Credit Suisse Asset Management, which oversees $100 billion in North America. "There are more disappointing confessions than there are those that say: 'We are going to deliver what we promised.'"
Indeed, weighing on the market are an increasing number of quarterly earnings reports and warnings, the kind of news that this week sliced the top off the autumn stock rally.
News about the war in Afghanistan also will play a big role in determining the market's direction.
Late Friday, investors snapped up stocks in part on the expectation the U.S. military might be divulging positive developments over the weekend, including pinpointing the whereabouts of Usama bin Laden.
Back on Wall Street, selected retailers and investment banks are due to report earnings this week, news that will offer telling views of consumer activity and the financial markets. The fourth-quarter confessional season — when companies warn results may miss forecasts — always heats up at the end of December.
The week's major earnings news will come in a rush on Tuesday, with results from Best Buy Co. Inc., Circuit City and 3Com Corp. On Wednesday, FedEx Corp. and Morgan Stanley will report results. On Thursday, Bear Stearns Cos. Inc., Goldman Sachs and NIKE Inc. will release earnings.
The week will bring the last of three readings on third-quarter gross domestic product, expected to show a drop of 1.1 percent, in line with the previous reading. Also, November's leading economic indicators will come out on Wednesday, and the University of Michigan will release its final December reading of consumer sentiment on Friday.
Grim Earnings Ahead
Analysts predict profits for Standard & Poor's 500 companies will sink almost 19 percent, according to research firm Thomson Financial/First Call. That forecast could drop further as analysts cut their outlooks throughout the quarter.
Companies ranging from drug makers like Merck & Co. and Bristol-Myers Squibb & Co. to technology heavyweights like Ciena Corp. and Lucent Technologies Corp. warned of disappointing results in the slumping economy last week.
"I think what you are going to see [this week] is more of that and that will keep the market in check," Nabi said. "I don't think it will fall off a cliff, but it will probably retrace some of the gains of recent weeks."
Last week, the Dow fell 2.4 percent, the Nasdaq dropped 3.4 percent and the S&P 500 gave back 3 percent.
Year to date, the S&P 500 is off 15 percent, the Dow has fallen 9 percent and the Nasdaq is down 21 percent. Yet stocks remain sharply higher from three-year lows hit on Sept. 21, after the air attacks on the World Trade Center and the Pentagon raised the risk factor in the equity market.
Since Sept. 21, the Dow has climbed 19 percent, the S&P 500 has gained 16 percent, and the Nasdaq has jumped 37 percent.
Some market strategists, though, believe the past week's declines will attract investors looking for relatively cheap stocks. They expect the late 2001 rally to get back on track.
This week "really is the last week of the year for all intents and purposes, because Christmas Eve and New Year's Eve fall on Mondays," said Brian Belski, market strategist at U.S. Bancorp Piper Jaffray.
"So I would not be surprised to see some valuation bottom fishing, looking for opportunities in the pullback that we have had," Belski said. The pharmaceutical sector, he added, could benefit, given the group's sharp decline last week on bad news from Merck and Bristol-Myers Squibb Co.
The American Stock Exchange Pharmaceutical index fell last week to lows unseen since late September. Merck & Co. (MRK.N) dropped below $60, a level unseen in 21 months.