The S&P 500 may again test its 1,160 ceiling in the coming week, but may not stay above it for long.
April 17, 2004: 2:19 PM EDT
By Mark Gongloff, CNN/Money senior writer
NEW YORK (CNN/Money) - For all the relentless optimism many forecasters have felt about U.S. corporate earnings and economic growth, you might think stock prices would be marching steadily upward this year.
They haven't. In fact, after a strong recovery in 2003, the S&P 500 index has been bumping up against the same ceiling over and over again so far this year, an upper bound it could test again in the coming week -- and maybe keep testing all summer long.
"This may be one of those years in the stock market where you'll want to sell on Memorial Day and go away until Labor Day," said John Augustine, chief investment strategist at Fifth Third Asset Management.
Earnings and economic growth will keep pushing the S&P 500 upward, Augustine said, while worries about higher interest rates, geopolitical tensions and the outcome of the U.S. presidential election in November will keep pushing it back down.
Interest-rate worries had the upper hand for most of last week, it seemed. Stronger-than-expected readings on retail sales and consumer price inflation in March convinced traders the Fed would be raising its target for a key overnight lending rate by August in order to cool down the economy and fight inflation.
Higher rates are generally anathema to stock prices -- the last two Fed rate-hiking campaigns have been followed posthaste by a lousy market for equities.
But lower-than-expected readings of weekly jobless claims, consumer confidence and industrial production, along with not-to-worry comments about inflation from Fed Governor Ben Bernanke and Richmond Fed President Alfred Broaddus, helped markets breathe a sigh of relief in the past week.
The biggest economic news this week will come from two appearances by Fed Chairman Alan Greenspan. If he is as sanguine about inflation as Bernanke and Broaddus, most of the pressure on the S&P 500 will likely be upward -- possibly helping it push above the 1,160 price ceiling that's been keeping the index down all year.
"That's a likely outcome," said Tony Dwyer, equity market strategist at FTN Midwest Research. "For the time being, as long as earnings are so strong, I think the worst [of the market's worry about a Fed rate hike] has probably already happened."
A slew of earnings reports this week will also likely give stocks a boost. S&P 500 earnings are on track to be at least 20 percent higher in the first quarter than a year ago, according to earnings tracker First Call, marking the best first-quarter performance since 2000.
Hopes are high for more good news this week, when 179 S&P 500 companies, including nearly half of the companies in the Dow Jones industrial index report. Among the big names reporting are Microsoft (MSFT: Research, Estimates), Coca-Cola (KO: Research, Estimates), Pfizer (PFE: Research, Estimates), AIG (AIG: Research, Estimates), General Motors (GM: Research, Estimates), Ford Motors (F: Research, Estimates), Amazon (AMZN: Research, Estimates), Charles Schwab (SCH: Research, Estimates), UPS (UPS: Research, Estimates) and Viacom (VIA: Research, Estimates) . [For a detailed look at these and other key earnings expected next week, click here.]
But there are still monsters under the bed. The situation in Iraq has deteriorated in recent weeks, the Associated Press reported Friday that Iraqi nuclear plants are apparently unguarded -- with nuclear materials leaving the country -- Osama bin Laden just put out another video tape and U.S. citizens have been asked to leave Saudi Arabia due to terror fears.
Though the war and the threat of terrorism haven't been huge factors in the market this year, the constant threat of things getting worse could linger over the market like a low-grade fever.
"Earnings are driving the testing of the top end for the S&P 500, but geopolitical issues are here to stay for some time," said Augustine of Fifth Third. "That will put downward pressure on the stock market."
Key events in the week ahead
Monday morning brings the Conference Board's index of leading economic indicators for March, expected to be up 0.3 percent after being flat in February, according to Briefing.com.
Tuesday afternoon, Greenspan appears before the Senate Banking Committee, though he's not expected to say much about the economy.
Wednesday morning, however, Greenspan appears before the Joint Economic Committee of Congress. He's used the JEC forum before to signal a shift in Fed interest-rate policy, so traders will be glued to their televisions for this.
Wednesday afternoon will bring the Fed's Beige Book report, which pulls together anecdotal evidence about the economy's strength from its various regional banks. The tone of this report could influence the Fed's thinking at its next policy meeting, scheduled for early May.
Thursday morning brings the report on new weekly claims for unemployment benefits. Economists haven't come up with a forecast yet for this number, according to Briefing.com -- they're likely still trying to figure out the implications of a surprising jump in claims last week. Most economists think it was just a one-time blip. If it's not, that could be a troublesome sign for the job market.
Friday morning brings the Commerce Department's measure of orders for long-lasting manufactured goods in March. Economists, on average, think orders grew just 0.7 percent, following February's 2.5-percent jump.
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