Wall Street looks to earnings for catalyst

Key Wall Street indexes have clawed their way back to approach their record highs after a solid week, and investors are now looking to the upcoming corporate earnings season for direction of the market.
Upbeat corporate reports, say analysts, could provide a catalyst for a market that has been stuck in a range with worries about the housing slump and high energy costs offsetting a generally positive economic backdrop.
In the week to Friday, the Dow Jones Industrial Average of 30 blue chips advanced 1.5 percent to end the holiday-abbreviated week at 13,611.68, near its all-time record of 13,676.32 on June 4.
The broad-market Standard & Poor's 500 index rallied 1.8 percent to 1,530.44, closer to its record of 1,539.86. The tech-dominated Nasdaq composite leapt 2.4 percent on the week to 2,666.51.
The market has held in a trading range with the Dow hovering between 13,200 and 13,700 for much of the past two months. But Larry Wachtel, chief market analyst at Wachovia Securities, said that may change as earning season opens.
"The week ahead kicks off the second quarter earnings season and provides some catalysts for a Wall Street community lacking in the same," Wachtel said.
Wachtel said analysts are projecting a 4.4 percent rise in profits but added: "We must remember that first quarter projections started out at plus 3.5 percent and ended up plus 8.5 percent."
This is part of a pattern, he said, "where companies 'lowball' expectations and then exceed projections." "We believe that the bulls will need to see good earnings over the next three weeks to re-ignite their interest in bidding up share prices," said Fred Dickson, chief market strategist at DA Davidson & Co.
Mace Blicksilver, analyst at Marblehead Asset Management, said he believes the earnings season will produce good results. "The economy basically is pretty strong so it would be surprising if you got a lot of earnings warnings," he said. On the economic front, investors and market analysts seem to be expecting an acceleration of growth after the tepid 0.7 percent pace of expansion in the first quarter.
Friday's report showing 132,000 new jobs created in June and revising upward the figures for April and May "adds to the evidence that the economy bounced back in the second quarter, probably to the 3.0 to 3.5 percent range," said Nigel Gault, economist at Global Insight.
In other data in the past week, a private survey by the Institute of Supply Management showed the vast services sector with robust growth. The ISM index of 60.7 percent was well above the 50 percent signifying growth.
Auto sales however were weak, suggesting some pullback by consumers. But some observers say the overall economy appears to be weathering the housing slide.
"Many analysts are waiting for the collapsed housing market to take its pound of flesh from other sectors of the economy, particularly consumer spending," said Beata Caranci at TD Bank Financial Group.
"However, neither this week's employment report nor economy-wide sentiment indicators suggest a hard landing is in the offing." But the strong economy has taken its toll on the bond market, forcing traders to scale back bets of a cut in US interest rates and position possibly for a rate hike.
Over the past week, the yield on the 10-year US Treasury bond jumped to 5.195 percent from 5.033 percent a week earlier. The 30-year bond yield rose to 5.282 percent from 5.126 percent. The rise in yields reflects lower bond prices. "The Fed is on inflation watch and much of the concern centres around labour," said Joel Naroff at Naroff Economic Advisors.