NEW YORK (Reuters) – Volatility could be the name of the game next week for the U.S. stock market with the earnings machine running at full tilt and the rising conflict in the Middle East.
So far, second-quarter earnings are shaping up stronger than expected, despite some disappointments from some big names in the technology sector. If more strong earnings reports flow in, that could coax some investors back into the stock market, analysts said.
The wild card, though, is still the Middle East.
Oil ended the week above $74 a barrel as Israel’s army called up reservists and launched small-scale raids in Lebanon in an effort to stop Hizbollah rocket attacks.
The U.S. economy’s health will get more scrutiny from Wall Street next week. A steady stream of reports will flow in, with the spotlight on existing home sales, consumer confidence, durable goods orders, new home sales and second-quarter gross domestic product.
“The story is going to continue to be earnings and the Middle East,” said Fred Dickson, market strategist at D.A. Davidson & Co. in Lake Oswego, Oregon.
Dickson pointed out that “a few more than expected companies have been lifting earnings guidance, so that’s providing an injection of some positive energy into the market.”
But stocks fell on Friday, wrapping up a volatile week, after personal computer maker Dell Inc. warned of a shortfall in quarterly earnings and revenue. The fighting in the Middle East also cast a pall over the market’s mood.
“We’re seeing a high degree of investor sensitivity to the situation in the Middle East,” Dickson said. “Very few clients seem interested in exploring stock bargains … and they have not forgotten the market meltdown of 2000 and 2001. Their fear is the Middle East will trigger a similar selling pattern.”
Thousands of Lebanese civilians fled their homes, fearing Israel will invade, while a massive evacuation of Americans and other foreign citizens from Lebanon to Cyprus and Turkey picked up steam.
The conflict between Israel and Lebanon, which began on July 12, has ratcheted up oil prices. U.S. crude oil for September delivery settled on Friday at $74.43 a barrel, up 16 cents.
A week ago, front-month U.S. crude futures briefly hit a record of $78.40 — the highest price since the New York Mercantile Exchange began trading oil futures in 1983.
In testimony before the U.S. Senate Banking Committee on Wednesday, Federal Reserve Chairman Ben Bernanke said he believes core inflation will moderate in the coming quarters. His remarks suggested that the Fed may be nearly done with its two-year cycle of raising interest rates.
Bernanke’s comments drove the major U.S. stock indexes up almost 2 percent on Wednesday, giving the blue-chip Dow average its second-best day of the year.
The euphoria didn’t last long.
“The rally in the wake of Federal Reserve Chairman Bernanke’s testimony reflected short covering that did not attract any follow-through buying,” said Chris Burba, short-term market technician at Standard & Poor’s in New York.
“In order for the market to achieve gains in the near term,” Burba added, “institutions need to start accumulating and there are no signs of this right now.”
On Thursday, the Fed released the minutes of its June policy meeting, which said members of the Federal Open Market Committee were uncertain about future interest-rate steps.
For the week, the Dow Jones industrial average rose 1.2 percent and the Standard & Poor’s 500 Index gained 0.3 percent.
But the Nasdaq Composite Index fell 0.8 percent, marking its third losing week in a row.
Earnings expectations for the second quarter have climbed recently as Reuters Estimates now projects S&P 500 earnings grew 10 percent in the second quarter, up from an expectation of 9.2 percent last week.
“We’re going to go back to watching the parade of earnings, and we’ll hopefully see some companies guide a little bit better than Dell,” said Todd Clark, director of stock trading at Nollenberger Capital Partners in San Francisco.
Next week, drugmakers Merck & Co., Schering-Plough Corp. and Bristol-Myers Squibb Co. are due to report quarterly results.
Investors may expect strong reports from the health-care sector after biotechnology giant Amgen’s quarterly results trounced estimates this week, Dickson said.
The energy sector, buoyed by oil’s recent run toward $80 a barrel, may lift the stock market in the coming week, when Exxon Mobil Corp., the world’s largest publicly traded oil company, and rival ConocoPhillips are expected to report second-quarter results.
Investors will get a feel for the consumer’s resilience in the face of high energy prices as earnings from Kraft Foods Inc., Amazon.com Inc. and General Motors Corp. are on deck. McDonald’s Corp. said it tentatively plans to release second-quarter earnings on Tuesday; it reported preliminary results on July 17.
Wall Street, already concerned about the cooling of the once-hot housing sector, will take special note of the National Association of Realtors’ report on existing home sales on Tuesday.
Economists polled by Reuters forecast that sales of existing homes fell in June to an annualized pace of 6.58 million units from an annual pace of 6.67 million in May.
On Tuesday, the Conference Board will release its consumer confidence index, expected to drop to 104.0 in July from 105.7 in June, according to the Reuters poll.
On Wednesday, the weekly mortgage data are due, as well as the Federal Reserve’s “Beige Book” report, which offers a look at the regional economies in the areas served by the 12 Federal Reserve district banks.
On Thursday, the June new home sales report will give more evidence about the extent of the housing sector’s slowdown. The Reuters forecast calls for new home sales to decline to a seasonally adjusted annual pace of 1.160 million units in June from 1.234 million units in May.
Thursday’s data calendar includes U.S. durable goods orders for June, forecast to rise 1.8 percent in June after a drop of 0.2 percent in May, according to the Reuters poll.
On Friday, the Commerce Department will give its estimate on second-quarter gross domestic product, which is the output of all goods and services produced within U.S. borders.
Economists polled by Reuters expect the GDP report to show that the U.S. economy grew at an annual pace of 3.0 percent in the second quarter, down from the first quarter’s growth rate of 5.6 percent.
Also on Friday’s agenda: The University of Michigan will give its final reading on its July consumer sentiment index, forecast to slip to 83.0 from June’s final reading of 84.9.