Stocks face challenge after Goldman lawsuit

New York: US stocks will likely hit major speed bumps this week as the bears step up pressure following fraud charges against Goldman Sachs and earnings will need to clear a high bar to give Wall Street a reprieve.

The market got a jolt on Friday as US securities regulators charged Goldman Sachs Group Inc with fraud in the structuring and marketing of a debt product tied to subprime mortgages.

Investors wondered whether the lawsuit from the Securities and Exchange Commission could be a harbinger of similar moves against other banks. It could also turn up the heat on financial regulation reform as Democrats push to get legislation to the Senate floor.

"It certainly looks like this could be the beginning of a period where you have a regulatory cloud over Goldman Sachs and perhaps even the entire investment banking industry," said Hank Smith, chief investment officer of Haverford Trust Co, in Philadelphia.

Future crisis

Investors are fearful that stricter regulation will take a bite out of bank profits without adequately protecting against another financial crisis in the future.

Meanwhile, the market faces a harried week for quarterly results with 11 Dow components and 123 S&P 500 companies releasing results.

But even strong results may not be enough to push stocks higher. After the S&P 500's rally of 76 per cent from last March's 12-year lows, analysts say stocks could already be "priced to perfection" and companies will need to show blockbuster numbers in order to be rewarded.

Case in point: Google. The company posted a 23 per cent jump in revenue, but it fell short of Wall Street's most bullish expectations, and the stock tumbled 7.6 per cent on Friday.

Strong earnings and forecasts from Intel Corp earlier in the week had created more optimism for a strong earnings season. As a result, the market could see knee-jerk reactions to the results from each major company.

Ammunition for reform

The data calendar is relatively light this week with March reports on the US Producer Price Index, home sales, durable goods orders and leading economic indicators on tap.

That could keep attention on the financial sector with a Senate vote on financial reform likely in the coming weeks. Senate Democratic Leader Harry Reid told reporters on Thursday he hopes to get the final bill on the floor this week.

A draft bill to regulate the $450 trillion (Dh1,652 trillion) over-the-counter derivatives market was unveiled on Friday, taking a tougher tack against big banks.

The charges against Goldman could provide more ammunition in favour of reform, said Dan Ripp, president of Bradley Woods & Co Ltd, in New York.

"It's an argument for more oversight, more precautions," Ripp said. "Those things are just not good for Wall Street."

Congress is pushing to rein in some of the risky practices that helped trigger the financial meltdown that led to the recession. However, some have argued more regulation is not necessarily the answer.

"The problems we have with the financial services sector are not because it's not regulated enough. The problem is that the people who were in charge of enforcing the rules and regulations that were already on the books were asleep at the wheel," Ripp said.

Déjà vu

If there's a sense of déjà vu to the market, it's because we've seen this before with the market rallying ahead of earnings season — only to sell off as reports roll out.

The Standard & Poor's 500 Index has gained 7.9 per cent since the beginning of March, but it ended the week nearly flat, thanks to Friday's 1.6 per cent drop.

For the week, the Dow Jones industrial average rose 0.2 per cent and the Nasdaq Composite Index climbed 1.1 per cent; the S&P 500 dipped 0.2 per cent.

"Expectations are sky high and this is the third earnings cycle where the market rallied with huge expectations only to have a pullback started in the second week of earnings," said Burt White, managing director and chief investment officer at LPL Financial, in Boston.

The index of leading economic indicators for March will kick off the week. Investors expect a gain of 1 per cent, far exceeding the gain of just 0.1 per cent the month before, according to economists polled by Reuters.

The overall PPI, a gauge of inflation at the wholesale or producer prices level, is anticipated to rise 0.4 per cent in March, compared with a drop of 0.6 per cent the month before. Core PPI, excluding volatile food and energy prices, is forecast to gain just 0.1 per cent in March, matching February's increase of 0.1 per cent.