Wall Street’s long-running rally has gotten a boost from the first batch of corporate earnings reports, but faces another barrage of results in the coming week that will test its momentum.
Investors will see dozens more third-quarter earnings reports from key firms, especially in the banking sector, that could provide clues on the health of the corporate sector and the overall economy.
In the week to Friday, the blue-chip Dow Jones Industrial Average vaulted 3.98 percent to 9,864.94, reaching its highest level in over a year.
The Standard & Poor’s 500 broad-market index rallied 4.51 percent to 1,071.49, just a fraction off a 12-month high, while the technology-heavy NASDAQ composite surged 4.45 percent to 2,139.28.
The market was energized in the past week by positive earnings surprises, notably from aluminum maker Alcoa, traditionally the first of the blue chips to report results.
Alcoa managed a profit of US$77 million, surprising analysts who had expected a fourth consecutive quarterly loss. The group also offered a better-than-expected outlook for the coming months, boosting hopes for recovery from the global recession.
“We see some signs that things are getting better, not getting great, but stabilizing, and that’s what this third quarter is all about,” said Marc Pado, analyst at Cantor Fitzgerald.
He said Alcoa’s report was especially welcome because “aluminum is a product critical for manufacturing, so it bodes well for the industrial sector.”
Stephen Auth at Federated Investments said he saw more upside surprises on the economy and earnings.
“Our sense remains that investors continue to underestimate the strength of the economic recovery which is already upon us,” Auth said in a note to clients.
Auth said economic activity was rebounding, housing was stabilizing and that jobs would come back slowly despite the current trend of rising unemployment.
The market was helped in the past week by a rate hike announced in Australia, which offered a signal that the global economy is emerging from recession.
Robert Kavcic at BMO Capital Markets said that a rally in response to a rate hike “might seem counter-intuitive on the surface,” but added: “it’s actually normal behavior for stocks to cheer rate hikes coming out of a recession.”
“For equity investors, the benefit of strengthening economic and earnings growth outweighs the cost of higher interest rates this early in the cycle,” he said.
Still, some fear the rally has carried stocks too far, making a correction inevitable.
“Our short-term concerns center around our belief that the market has gotten ahead of the recovery and more and more economic reports have fallen short of expectations,” Scott Marcouiller at Wells Fargo Advisors said. “We don’t see serious downside, but do believe it is prudent for investors to use caution and withhold new buying.”
The coming week will provide investors with information on the banking sector, struggling to emerge from the horrific financial crisis. JPMorgan Chase, Citigroup, Bank of America and Goldman Sachs will reveal results for the past quarter.
Other firms reporting include Google, IBM and General Electric.
Reports on US retail sales, industrial production and inflation also loom.
Bonds were hammered as the market shifted its expectations on economic recovery.
The yield on the 10-year Treasury bond jumped to 3.384 percent from 3.221 percent a week earlier and that on the 30-year bond increased to 4.227 percent from 4.011 percent.
Bond yields and prices move in opposite directions.
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