NEW YORK – When the first round of 2004 earnings results starts pouring into the market next week, stocks are likely to stick to a sideways trend, market strategists say.
The cues for the stock market's direction will come from corporate forecasts for 2005, when profit growth is expected to lag last year's.
"I'd be surprised if there was anything in the first wave of results that would encourage aggressive buying of equities," said Christine Callies, chief market strategist at Bessemer Trust, with about $40 billion in assets under management.
Stock prices will "bounce around a lot" as the market lacks "much of an underlying trend," she said.
"The economy is proving to be pretty stable, so there is no compelling reason to dump stocks, but earnings growth is going to be slowing this year," she said.
What the market yearns for most right now, Callies added, is confirmation that the Federal Reserve will not abandon its pace of gradual interest-rate increases for a more aggressive approach.
Investors became alarmed over this prospect three days ago. On Tuesday, the minutes from the Federal Open Market Committee's (search) Dec. 14 meeting said rates remained too low to contain inflation. The Dow Jones industrial average ended the day down nearly 100 points at about 10,630, deepening the early 2005 rut for U.S. stocks.
For the first week of the new year, stocks fell. The Dow finished the week down 1.7 percent, while the Nasdaq Composite Index fell 4 percent, and the Standard & Poor's 500 index slipped 2.1 percent.
With the Fed's pricing concerns on Wall Street's mind, the release of the Producer Price Index (search) — a key measure of wholesale inflation — will command attention next Friday. The Labor Department (search) releases the December PPI report at 8:30 a.m..
Economists in a Reuters survey expect a median decrease of 0.1 percent in the overall PPI in December, compared with a 0.5 percent increase in November. Excluding volatile food and energy prices, the core PPI is forecast to rise 0.2 percent in December, compared with a 0.2 percent gain in November.
Some heavy hitters are on the earnings deck for the coming week, including Alcoa Inc. (AA), Intel Corp. (INTC), Apple Computer Inc. (AAPL) and Sun Microsystems Inc. (SUNW). Alcoa and Intel are among the Dow's 30 components. Intel, which trades on Nasdaq, also is one of the Nasdaq's most closely watched stocks — along with Apple and Sun Micro.
Their quarterly assessments will shed some light on commodity costs and prices, rising interest rates, the impact of the weak U.S. dollar and what they see in the future, as well as demand for computer chips and PCs as 2005 gets under way.
Overall earnings growth for all the companies in the S&P 500 this year is now predicted to be around 10 percent — about half the growth expected for 2004.
Alcoa will report results for the fourth quarter of 2004 and the year after Monday's stock market close.
When Alcoa, the world's largest aluminum producer, talks, the stock market listens. Ears will be tuned to Alcoa's executive discussions for indications of where commodity prices are going.
This will apply to both the prices Alcoa must pay for raw materials, like caustic soda, and the prices it gets for its final products. Alcoa, a global corporation, may give the market more intelligence about the effect of the dollar's weakness against other major currencies with the comments in its earnings report and its executives' presentations in a conference call with analysts and investors.
Prices for aluminum and most other raw materials climbed sharply last year, in part due to surging demand by Chinese manufacturers. Now there is concern about China's efforts to rein in its economic growth and a slowdown in demand.
Intel reports its earnings about 24 hours later, after Tuesday's closing bell.
Five weeks ago, Intel, the world's largest maker of microchips, increased its quarterly revenue outlook, citing strong worldwide demand for its microprocessors and reduced levels of inventories.
Intel's revenue in the quarter ending Dec. 25 is now expected to reach $9.3 billion to $9.5 billion — up from an earlier target of $8.6 billion to $9.2 billion. At those levels, Intel will set a new all-time high, breaking a record of $8.74 billion reached in last year's fourth quarter.
In addition to Friday's PPI data, other major economic news expected next week will include December retail sales and November business inventories.
Early Thursday, the Commerce Department (search) will release December retail sales at 8:30 a.m. .
Economists in a Reuters survey expect a median increase of 1.00 percent in December sales, compared with a gain of just 0.1 percent in November. Excluding automobiles, December retail sales are seen up 0.4 percent, compared with a 0.5 percent increase in November.
Friday, the business inventories data for November will be released by the Commerce Department at 8:30 a.m. Economists in a Reuters survey forecast a median gain of 0.6 percent in November, after October's 0.2 percent rise.