New York: Wall Street could keep rallying after notching its best week this year if Federal Reserve Chairman Ben Bernanke gives a reassuring assessment of the recovery and retail earnings show improvement.
Investors are eager to hear more on the thinking behind the Fed's surprise move to raise its discount rate, especially because the Fed's loose monetary policy has provided a crucial spur to equities' advance since their March 2009 bottom.
While the rate hike suggested that the Fed now considers the financial sector to have healed sufficiently to warrant taking back extraordinary liquidity, the hike also sparked unease about a possible broader removal of econ-omic stimuli.
Bernanke's semi-annual testimony on monetary policy before congressional panels this week takes on an even more important dimension as investors look for clarity on the Fed's intentions and how Bernanke sees the recovery progressing.
Fed's track
"We will be watching for more confirmation of which track the Fed is on," said John Praveen, chief investment strategist at Prudential International Investments Advisers LLC in Newark, New Jersey. "We will be looking for more colour on the timing of the [exit strategy]."
The Fed has said its benchmark fed funds rate would remain exceptionally low for an extended period to sustain the recovery, but there has been little light on the timeline of its exit strategy and what risks that might entail, more so with a high US unemployment rate still a big menace.
"Is [the rate hike] a reflection of its confidence in the stabilisation of markets and the economic recovery, or are they very worried about inflation and therefore are hiking rates?" added Praveen.
Earnings from major retailers, including Home Depot Inc, Target Corp and Macy's Inc will also be in the spotlight, along with key economic data, including February consumer sentiment and January new home sales.
Luxury homebuilder Toll Brothers, gold miner Newmont Mining Corp and grocer Safeway Inc are on the earnings scoreboard. With consumer spending accounting for about two-thirds of US economic activity, any indication that consumers are again spending should go a long way in reassuring investors about the outlook for profits and add to the prevailing optimism that has underpinned the stock market's rebound from the recent selloff.
Beating expectations
Of the 422 S&P 500 companies that have reported earnings as of Friday, 72 per cent have beaten analyst expectations, 10 per cent have matched estimates and 18 per cent have missed estimates, according to Thomson Reuters data.
That is well above the 61 per cent that have beaten estimates in a typical quarter since Thomson Reuters began tracking data in 1994.
Optimism about the recovery has helped the benchmark S&P 500 trim its losses since its January 19 peak to 3.6 per cent decline through Friday. The index fell by as much as eight per cent through February 8.
Investors have been scouring for beaten-down shares in growth-oriented stocks like commodities, technology and consumer discretionary sectors in the market's latest rebound, helping the S&P 500 score its biggest weekly advance since November on Friday.
On the week, the S&P 500 rose 3.1 per cent, the Nasdaq gained 2.8 per cent and Dow Jones industrial average climbed three per cent.
"The reason stocks begin to work from here is that the data that came out of the fourth quarter was generally positive, visibility is improving and now we are starting to see that delinquencies are stabilising," said Thomas Lee, chief US equity strategist at J.P. Morgan in New York.
"The macro trends are all moving in the right direction."
Bernanke is scheduled to testify before the US House of Representatives Financial Services Committee on Wednesday and the next day he is due to testify before the US Senate Banking Committee.
EU progress
In addition to Bernanke's comments, the direction of the stock market could turn on how much progress the European Union makes in its efforts to allay investors' fears about Greece's fiscal deficit problems and concerns about the stability of the euro.
