New York: Optimism about an improving labour market and corporate profits could propel US stocks higher this week as earnings season approaches.
Analysts expect trading at the week's outset to be dictated by Friday's non-farm payrolls report, which showed the economy added 162,000 jobs in March, the fastest pace of growth in three years. US markets were closed for the Good Friday holiday.
"Things have been getting better. There's no question about it. We've had a remarkable V-shaped recovery since last March," said Alan Valdes, director of floor operations for Kabrik Trading in New York.
The market could have momentum on its side as investors turn their attention to what is expected to be a strong earnings season.
The broad Standard & Poor's 500 achieved its fourth consecutive quarterly gain last week and scored its best monthly rise since last July. For the first quarter, the S&P 500 climbed 4.9 per cent. For March alone, it gained 5.9 per cent. On Thursday, the S&P ended at 1,178.10 — an 18-month high. For the short holiday week, it was up 1 per cent.
The Dow, meanwhile, has its sights set on the psychologically important 11,000 level, which could be taken out tomorrow if there is enough enthusiasm over the jobs report.
The payrolls data will lend support to markets, as US stock futures rallied on Friday in the wake of the release. Private hiring was stronger than anticipated, bolstering the view the economy is starting to find its footing and, as a result, needs less government support.
However, with the S&P 500 stock index up 74 per cent from the March 2009 closing low, some worry the rally will be interrupted if the economy does not maintain its strength.
"The road to a self-sustaining economic recovery, which is the thesis of the bullish cabal, is going to be tested," said Doug Kass, president of Seabreeze Partners Management, in Palm Beach, Florida.
As well as the payrolls report, investors will take in minutes from the Fed's rate-setting meeting in March, and a round of data that includes February pending home sales and an ISM survey on the US services sector for March.
Analysts expect first-quarter earnings for S&P 500 companies to rise 36.3 per cent, according to Thomson Reuters data. That's slightly less than the 37.2 per cent growth that was expected in January and well off the 51.2 per cent that was anticipated in October.
While expectations have come down somewhat, analysts' estimates could be closer to the mark than in recent quarters, said Scott Wren, senior equity strategist at Wells Fargo Advisors in St. Louis.
"Coming into 2009, estimates were off by $20 or $30. I think people have a better, more realistic feel for what earnings are going to be now," Wren said.
Investors will be keen for corporate guidance heading into the earnings season, which kicks off with Alcoa Inc on April 12.
So far, 70 S&P 500 companies have given negative pre-announcements, compared with 55 companies that have given positive ones.
Honeywell was an exception to the negative bias last week when the diversified manufacturer raised its profit outlook, citing stronger orders and sales in several markets. While some of the earnings enthusiasm could already be priced in, preventing a swift, large rally, good results should give the market enough support to drift higher, said Matt Kaufler, portfolio manager and equity analyst at Clover Capital Management, New York.
"In terms of providing another check that this recovery is gathering its sea legs, I think the earnings season is going to provide that confirmation point," Kaufler said.
Exit signs
Minutes from the Federal Reserve's most recent rate-setting committee meeting will be released on Tuesday.
Fed chairman Ben Bernanke will speak to the Dallas Regional Chamber of Commerce on Wednesday.
Investors will watch for any additional details on the Fed's plans to unwind its stimulus measures.
In a relatively light week for data, one of the more influential reports will come tomorrow with the Institute for Supply Management's non-manufacturing index for March. This ISM index, which assesses activity in the huge US services sector, is forecast to rise to 54.0 in March from 53.0 in February, according to economists polled by Reuters.
February pending home sales, also due tomorrow, are expected to dip 0.1 per cent, improving from January's sharp drop of 7.6 per cent.
Friday's wholesale inventories report for February is expected to show a gain of 0.4 per cent from a revised loss of 0.1 per cent in January.
Recovery
- S&P 500 maintains impressive run
- 4.9% the S&P 500's gain in the first quarter
- 5.9% the gauge's rise in March alone
- 1% the index's gain for the holiday week
