US stocks will likely hit major speed bumps next week as the bears step up pressure following fraud charges against Goldman Sachs, and earnings will need to clear a high bar to give Wall Street a reprieve.
The market got a jolt on Friday as US securities regulators charged Goldman Sachs Group Inc with fraud in the structuring and marketing of a debt product tied to subprime mortgages.
Investors wondered whether the lawsuit from the Securities and Exchange Commission could be a harbinger of similar moves against other banks. It could also turn up the heat on financial regulation reform as Democrats push to get legislation to the Senate floor.
“It certainly looks like this could be the beginning of a period where you have a regulatory cloud over Goldman Sachs and perhaps even the entire investment banking industry,” said Hank Smith, chief investment officer of Haverford Trust Co in Philadelphia.
Investors are fearful that stricter regulation will take a bite out of bank profits without adequately protecting against another financial crisis in the future.
Meanwhile, the market faces a harried week for quarterly results with 11 Dow components and 123 S&P 500 companies releasing results.
But even strong results may not be enough to push stocks higher. After the S&P 500’s rally of 76 percent from March last year’s 12-year lows, analysts say stocks could already be “priced to perfection” and companies will need to show blockbuster numbers in order to be rewarded.
Case in point: Google. The company posted a 23 percent jump in revenue, but it fell short of Wall Street’s most bullish expectations, and the stock tumbled 7.6 percent on Friday.
Strong earnings and forecasts from Intel Corp earlier in the week had created more optimism for a strong earnings season. As a result, the market could see knee-jerk reactions to the results from each major company.
The data calendar is relatively light next week with reports for last month on the US Producer Price Index, home sales, durable goods orders and leading economic indicators on tap. That could keep attention on the financial sector with a Senate vote on financial reform likely in the coming weeks. Senate Democratic Leader Harry Reid told reporters on Thursday he hopes to get the final bill on the floor next week.
A draft bill to regulate the US$450 trillion over-the-counter derivatives market was unveiled on Friday, taking a tougher tack against big banks.
The charges against Goldman could provide more ammunition in favor of reform, said Dan Ripp, president of Bradley Woods & Co Ltd in New York.
“It’s an argument for more oversight, more precautions,” Ripp said. “Those things are just not good for Wall Street.”
Congress is pushing to rein in some of the risky practices that helped trigger the financial meltdown that led to the recession. However, some have argued that more regulation is not necessarily the answer.
The Standard & Poor’s 500 Index has gained 7.9 percent since the beginning of last month, but ended the week nearly flat thanks to Friday’s 1.6 percent drop. For the week, the Dow Jones industrial average rose 0.2 percent and the NASDAQ Composite Index climbed 1.1 percent. The S&P 500 dipped 0.2 percent.
“Expectations are sky high and this is the third earnings cycle where the market rallied with huge expectations only to have a pullback started in the second week of earnings,” said Burt White, managing director and chief investment officer at LPL Financial, in Boston.
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