Earnings Jitters, Oil May Drag on Stocks

NEW YORK – Nagging worries about corporate earnings and spiking oil prices are set to keep stocks under pressure next week, dissuading investors from diving back into the market.

Disappointing reports from blue-chip companies such as Microsoft Corp. (MSFT) and Coca-Cola Co. (KO) added to the week's choppy trading and violent swings, pushing the Dow Jones industrial average below the psychologically important 10,000 mark.

The Standard & Poor's 500 is down nearly 5 percent this month, with one trading week left. Assuming there is no change next week, the loss for the month will be the largest since December 2002 when the S&P 500 shed around 6 percent.

The stock market's weakness is likely to continue, if more companies give poor outlooks or miss their earnings guidance next week.

"This is going to be another tortuous week because we will see a market that's trendless and friendless," said Hugh Johnson, chief investment officer at First Albany Corp.

"We've got so many crosscurrents. There will be a focus on long-term interest rates, oil prices, Iraq, the election and the Democratic Convention."

Among the crowd of companies set to report as the earnings season continues in full swing are Boeing Co. (BA), the No. 2 U.S. defense contractor and a maker of commercial jets; Exxon Mobil Corp. (XOM), the world's largest publicly traded oil company, and Time Warner (TWX), one of the largest U.S. media corporations.

Meanwhile, economic reports could give more evidence of a weak June. The market will be focused on data on home sales, durable goods and the first estimate of GDP for the second quarter.

Wall Street likely will remain jittery about oil prices. On the New York Mercantile Exchange (search), crude oil for September delivery ended the week at $41.71 a barrel, as dealers worried about potential disruptions of supply.

"Oil is a wild card and it will weigh on stocks if it continues to move higher," said Paul Cherney, chief market analyst at Standard & Poor's.

High oil prices generally dampen stock prices because of their impact on corporate profits.

To ratchet up the nervous tension, security concerns surrounding the Democratic Convention in Boston could keep up the pressure on stocks. Unprecedented security arrangements have been put in place, made even stricter by non-specific threats from terror groups intent on disrupting the U.S. election.

Strategists see the market staying range-bound next week, arguing there is little to shake it out of its malaise.

The blue-chip Dow Jones industrial average ended the week down 1.75 percent at 9,962.22, while the tech-laced Nasdaq Composite Index fell 1.8 percent during the week to close at 1,849.09. The broad Standard & Poor's 500 dropped 1.4 percent for the week, finishing at 1,086.20.

Caution in the Wind

Earnings so far have been generally positive, but second- quarter figures have been overshadowed by cautious outlook statements.

S&P 500 companies are expected to report second-quarter earnings growth of 23 percent, compared with first-quarter growth of 24.5 percent, according to Reuters Estimates.

While companies are still expected to report good earnings growth in the second quarter, the market will stay jittery if firms remain wary about prospects for 2005.

"It's a difficult time in the market and a lot of people will be content to stay on the sidelines," Cherney said.

Among companies reporting next week are defense contractor Lockheed Martin Corp. (LMT) Tuesday. On tap Wednesday: earnings from Anheuser-Busch Cos. (BUD), Inc., the maker of Budweiser beer, and results from oil and gas producer ConocoPhillips (COP).

HOME SALES, DURABLE GOODS AND GDP

Markets will be hit with a slew of data, which could reinforce the view that June was a weak month.

"We know what happened to the economy in June — it slowed — and there's no economic number next week that's going to change that view," First Albany's Johnson said.

Existing home sales for June, out Monday, are expected to come in at a seasonally adjusted annual pace of 6.67 million units, down from 6.8 million in May, according to a Reuters poll.

New home sales for June, out Tuesday, are forecast at a seasonally adjusted annual pace of 1.278 million units, down from 1.369 million the previous month.

Durable goods orders for June, due Wednesday, are forecast to have risen by 1.9 percent, after May's revised rate of down 1.8 percent. In addition, the Federal Reserve's "Beige book," a survey of regional economic activity, will be released Wednesday.

The focus for the week is likely to be the first estimate of second-quarter U.S. gross domestic product. A Reuters poll forecast is for growth of 3.6 percent, compared with 3.9 percent in the first quarter.

However, markets likely will be holding back for the following week's data, which will give the first real snapshot of how the economy fared in July — and further clues about how fast the Federal Reserve is likely to raise rates. During the first week of August, the most crucial reports will include the Institute for Supply Management's look at the manufacturing and services sectors, plus July non-farm payrolls data.

"Even though next week is a lot busier than this week, which was pretty dead on the data front, you're still not getting that much illumination on how the third quarter started off," said John Shin, U.S. economist at Lehman Brothers.

"It's a deceptively heavy data week. We've got a lot of noise, but not as much signal in terms of the economy."