Oil Price, Fed to Drive Stock Rally

U.S. stocks are on their best ride of the year, but with scant earnings or economic data to drive the market next week, the rally's future is at the mercy of volatile oil prices and a few choice words from the Fed.

Major stock indexes climbed last week. The Dow Jones industrial average (search) and the Standard & Poor's 500 index (search) posted their best gains since the re-election of President Bush last November.

The surge came as the price of oil dropped below $47 a barrel for the first time since February.

On Tuesday, the Federal Reserve (search) is expected to release minutes of the May meeting of the Federal Open Markets Committee; investors will be watching closely for an indication of how long the Fed will continue to raise interest rates. .

As the corporate earnings season comes to an end, only a handful of big names are on deck with quarterly scorecards next week. Among them are Campbell Soup Co. (CPB), Medtronic Inc. and Computer Associates International Inc. (CA).

With so few companies reporting, analysts said that oil prices will stay on investors' radar screens.

If crude prices remain under $50 a barrel, stocks could keep or extend their recent gains, investment strategists said, while a pickup in energy prices could raise concerns about future profitability.

Oil influences corporate profitability through the cost of everything from shipping to plastics. The runup in gasoline and heating oil prices also has eaten into consumers' disposable income.

"If oil prices continue to fall ... that basically pulls back any cost pressures that might be building," said Subodh Kumar, chief investment strategist at CIBC World Markets, who works in Toronto.

Dean Gulis, vice president at Loomis Sayles & Co., of Bloomfield, Mich., said, "The market seems to be reacting on a day-to-day basis most specifically to change in the direction of energy prices.

"I don't expect there to be a major break in oil, but a modest break in oil. And simply the fact that it's not going up" bodes well for stocks, he said.

U.S. crude oil for June delivery settled Friday at $46.80, down 12 cents. The June crude contract expired at the close of trading on the New York Mercantile Exchange (search).

Friday, the blue-chip Dow Jones industrial average finished at 10,471.91, up 331.79 points during the week for a gain of 3.27 percent. The broader Standard & Poor's 500 Index closed at 1,189.28, reflecting a weekly gain of 35.23 points or 3.05 percent. The tech-driven Nasdaq Composite Index ended at 2,046.42, up 69.64 points, or 3.52 percent for the week.

Several transactions helped drive markets over the past week, including a planned acquisition led by America West Holdings Corp. (AWA) of bankrupt US Airways Group Inc. and a deal led by private equity firm Ripplewood Holdings LLC in which appliance maker Maytag Corp. agreed to be taken private.

"The support for the market has been deals. Between hedge funds and corporations, there's plenty of money to buy the right company at the right price," said Jim Awad, chairman of Awad Asset Management, of New York.

"Economic data has been strong enough to indicate future earnings growth and soft enough to allay inflation fears."

U.S. economic indicators set for the week ahead include durable goods orders and new home sales, both from the Commerce Department (search) on Wednesday. Durable goods sales are seen up 1 percent in April, according to a Reuters poll of economists, following a 2.8 percent decline in March. New home sales are seen declining to a seasonally adjusted annual rate of 1.350 million units in April from 1.431 million in March.

Thursday, Commerce is expected to release preliminary numbers showing real gross domestic product grew at an annual rate of 3.6 percent in the first quarter. This report follows the Commerce Department's advance look at first-quarter GDP on April 28, when it reported a rise of 3.1 percent.

So far this quarter, corporate earnings have generally topped Wall Street forecasts. According to Reuters Estimates data, of the 475 companies in the Standard & Poor's 500 index that have reported results so far, 312 have beaten expectations. The reporting companies on average have topped consensus by 4.9 percent.

Of the coming week's reports, Campbell Soup on Monday is expected to post third-quarter earnings per share, excluding charges, up 3.8 percent on a revenue increase of 5.3 percent, according to Reuters Estimates.

In its fourth quarter, Medtronic is seen reporting pre-charge EPS up 10.8 percent on 6.3 percent revenue growth. Medtronic will release its results Tuesday.

Computer Associates, which will post its fourth-quarter earnings Thursday, is expected to rack up an 8.9 percent gain in pre-charge EPS, on a 7.9 percent revenue increase.

Joe Kalinowski, senior market strategist at Grace Financial Group, a Southampton, New York-based broker-dealer, said he believed stocks were well positioned for the week ahead.

"I'm leaning long now," he said. " A lot of negative sentiment has been washed out of the market."