NEW YORK—It will be tough for Wall Street to shake off the bear market blues next week if the price of oil keeps rising and the earnings season kick-off from Alcoa and General Electric disappoints investors.
Earnings estimates for the second quarter have fallen steadily after several big U.S. companies, like United Parcel Service, rattled investors in recent weeks with profit warnings, blaming the sluggish economy and soaring oil prices.
Oil has become the biggest wild card for growth and corporate profits. It jumped to a record above $145 a barrel on Thursday, driven by tensions between Israel and Iran, before the long holiday weekend to mark U.S. Independence Day. The price of crude is up 50 percent so far this year.
On Friday, U.S. markets are closed on July 4th for the Independence Day holiday.
Financial results from Alcoa and GE will kick off the second-quarter earnings season next week. Aluminum company Alcoa, the first Dow component to report results, will release its quarterly numbers on Tuesday. GE, another Dow industrial and a bellwether for the U.S. economy, will report earnings on Friday. Aside from second-quarter results, investors are anxious to see the companies' forecasts for world economic growth and their own corporate sales prospects.
More clarity on the economic outlook may come from Federal Reserve Chairman Ben Bernanke. He is expected to speak twice, first at an FDIC mortgage lending forum on Tuesday and on Thursday, he will testify before on financial market regulation before the House Financial Services Committee.
But it's oil that will remain a top concern.
"The price of crude oil is on the top of everyone's list," said Dan Peirce, a portfolio manager of the global asset allocation group at State Street Global Advisors in Boston. "We saw a pullback one month ago, only to see it come back with a vengeance, which really pressured major equity markets."
Expectation was high that a combination of a weak U.S. dollar, lower U.S. crude stockpiles and tension between Israel and major oil producer Iran would push prices to $150 a barrel before the close of trade, in line with a prediction made last month.
When Bulls Bite Their Nails
For the holiday-shortened week, the Dow Jones industrial average ended down 0.5 percent, the Standard & Poor's 500 Index slid 1.2 percent and the Nasdaq Composite Index dropped 3 percent. This was the fifth straight weekly decline for the S&P 500 and the Nasdaq, and the Dow's third straight week of losses.
On Wednesday the Dow closed more than 20 percent below its all-time closing high reached in October, crossing the threshold typically considered as the onset of a bear market.
The Dow closed above that mark on Thursday. But the broader S&P 500 index on Thursday slipped into bear territory during the trading session, unable to withstand the avalanche of gloomy global economic news and profit outlooks, surging inflation fears and weakening consumer confidence.
While the S&P 500 eked out a slight advance by Thursday's close to climb out the bear market, optimism appeared scarce that there would be enough bargain hunting next week to help stocks decisively snap out of their slump.
"We've become nervous bulls," said Brian Gendreau, a New York-based investment strategist at ING Investment Management Americas, which recently went "neutral" on U.S. stocks.
"Equities have become a play on oil and we just do not know what oil will do. So we are on the sidelines for now," he added.
Oil crossing $150 a barrel will drive the stock market to increasingly look at geopolitical tensions as being more a driver in crude prices than the supply-and-demand equation, said Fred Dickson, market strategist and director of retail research at D.A. Davidson & Co in Lake Oswego, Oregon.
"Investors have a degree of reason to their nervousness with the saber rattling between Israel and Iran," he said.
"Every $10 rise in the price of oil is going to create an uncertain incremental environment drawing money from equities into investment in oil," he added. "Higher energy prices slow economic growth, with oil being a tax on consumer spending."
GE—for Better or Worse
General Electric, the second-largest U.S. company by market capitalization, will garner a great deal of attention when it releases quarterly earnings at the end of the week.
The company is viewed as an economic bellwether because of the range of its businesses. Since financial services account for a large chunk of its revenues, GE's results are also scrutinized for clues on the health of the financial sector, the biggest drag on the stock market this year.
Reuters Estimates sees GE reporting profit of $5.33 billion in the second quarter, or 54 cents per share, compared with year-earlier earnings of $5.4 billion.
Results deviating from forecasts are expected to wield a disproportionate impact on the market, for better—if earnings are higher than expected—or worse, if the company misses earnings, such as occurred in the first quarter.
"GE normally hits the Wall Street consensus number," Dickson said. "If they miss the (EPS) number by a nickel, it's like missing it by a thousand miles."
Fresh in the market's memory is GE posting an unexpected drop of 6 percent in first-quarter profit, with an EPS of 44 cents a share, 7 cents below analysts' forecasts.
The news drove GE's stock down nearly 13 percent, their sharpest drop in two decades, wiping out about $45 billion of market value and dragging global markets down into the mud.
The earnings figures aside, the stock market will be looking for market direction by poring over what GE has to say about the next quarter or two, said Andre Bakhos, president of Princeton Financial Group in Princeton, New Jersey.
"They (investors) don't want to hear about a slowdown in any major economies," he said. "They don't want to hear about paring back revenue estimates. That would exacerbate already heightened fears of recession woven into the market."
Alcoa's earnings on Tuesday will be put under the microscope for comments about industrial demand in economies abroad, particularly Asia and South America, he added.
Snapshots of Consumer Demand
On the economic calendar, data gauging consumer demand and sentiment will be front and center, Bakhos added.
Closely watched will be the preliminary reading of the Reuters/University of Michigan Surveys of Consumers for July, forecast in a Reuters poll to slip below the reading for June, which hit a 28-year low.
Also tapping the pulse of the consumer will be June sales reports from major chain stores on Thursday, including Wal-Mart Stores, the world's No. 1 retailer.
A gauge of the battered housing sector, an index of pending home sales for May, is due on Tuesday. A Reuters poll forecast the May index down 2.5 percent, in contrast to April's jump of 6.3 percent.