NEW YORK (CNN/Money) -
After a busy week of international and economic news, U.S. investors get a breather in the coming week before the flood of second-quarter earnings reports.
But it will not be an easy rest -- one eye will be on the lookout for earnings pre-announcements.
In the week just ended, after the handover of sovereignty in Iraq and the first Fed rate hike in more than four years, events about as surprising as a Jennifer Lopez divorce, markets mostly yawned. (For a list of this week's key events, click here.)
But a weaker-than-expected jobs report, along with other weak economic news and a series of earnings warnings and analyst downgrades, battered stocks at the end of the week.
The Dow Jones industrial average and the S&P 500 each lost 0.8 percent on the week, while the Nasdaq lost 0.9 percent.
At first blush, there would seem to be little on the calendar in the coming week that would inspire much market activity one way or the other. Economic numbers are scarce. The only big earnings reports due in the week are from Alcoa (AA: Research, Estimates) and Yahoo! (YHOO: Research, Estimates) on Wednesday, and GE (GE: Research, Estimates) on Friday.
But those are pretty big earnings reports. Alcoa could have something to say about demand for metals and the future direction of commodities prices. Analysts, on average, expect the aluminum maker to earn 47 cents per share in the quarter, compared with 27 cents a year ago, according to earnings tracker First Call.
Internet portal Yahoo! is expected to report earnings of 8 cents per share, compared with 4 cents a year ago. Last week, Smith Barney cut its rating on Yahoo! shares, saying they were getting too pricey.
GE -- which may have something to say about how higher interest rates will affect its massive financing arm -- is expected to earn 37 cents per share, compared with 38 cents a year ago.
And the week could bring more pre-announcements. If they're anything like the past week's, that would be bad news.
In that week, more than 25 companies warned of lower-than-expected earnings, including Washington Mutual (WM: Research, Estimates), Cardinal Health (CAH: Research, Estimates), Emulex (ELX: Research, Estimates) and 1-800-FLOWERS (FLWS: Research, Estimates), to name a few.
Meanwhile, Wal-Mart (WMT: Research, Estimates) and Target (TGT: Research, Estimates) warned of weaker-than-expected June sales and GM (GM: Research, Estimates) and Ford (F: Research, Estimates) reported an unexpectedly large drop in auto and truck sales in June.
These companies have so far been in the minority. According to the latest data from First Call, the ratio of negative to positive pre-announcements has been just 0.8 in this quarter, compared with 2.1 a year ago.
And analysts widely expect year-over-year earnings growth to top 20 percent this quarter, marking the fourth straight quarter of 20-percent-plus gains in earnings.
But that could be the problem for stocks: Another quarter of ridiculously strong earnings has probably already been priced into the market. Just as stocks sold off following the Iraq handover and the fed rate hike, they may have little reason to rise after long-telegraphed earnings gains.
"The old 'buy the rumor, sell the fact' trade is in play now, and that will apply to the expected results set to come out," said Michael Panzner, head of sales trading at Rabo Securities USA.
Looking ahead, stocks would seem to have even bigger mountains to climb. The economy appears to have cooled off, and year-over-year earnings growth is likely to slow down, as well, in part due to tough comparisons with strong growth in the second half of 2003.
In a note to clients last week, Merrill Lynch analysts pointed out that, despite the first quarter's stellar earnings growth, profit margins stalled. Merrill suggested margins have peaked, thanks to rising employment and wages and little room left for cost-cutting in other areas.
Future earnings growth will depend, then, on pushing sales higher, and that looks like no mean feat.
"In order to see sales and profits accelerate from current growth rates, we would need to see a sharp pickup in economic growth as well as a material improvement in corporate pricing power, both unlikely scenarios in our view," the Merrill note said.
Key events in the week ahead:
- Markets will be closed Monday in observance of the July 4 holiday.
- Before markets open again Tuesday morning, Richmond Fed President Alfred Broaddus will speak about the economy at a conference sponsored by the Southeastern Association of Tax Administrators.
- Later Tuesday morning, the Institute for Supply Management releases its June index of service-sector activity. Economists, on average, expect the index to slip to 65 from May's 65.2 reading.
- At noon on Wednesday, Fed Vice Chairman Roger Ferguson is scheduled to speak to the New York Association for Business Economics.
- Thursday morning, the Labor Department releases figures for unemployment claims in the week ending July 2. Claims rose to 351,000 the prior week.
- Friday afternoon, Kansas City Fed President Thomas Hoenig will speak in Columbus, Nebraska, about monetary policy.
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